If I invest £20k in shares, I reckon it’s enough to help me achieve financial freedom with those shares.
For example, many people quote a high-single-digit percentage figure as the likely annualised return from the general stock market. So, let’s assume an annualised return from share investments of 7%.
I’d invest £20k and compound the gains
I like to plug figures into one of the several online compound interest calculators to see how annualised returns might compound over time. And I reckon the 7% figure is a realistic base assumption. The following table shows what investing £20k and compounding a 7% annualised return will give me over time.
And I reckon the figures show the dramatic effect that compounding returns can have on my investments. Indeed, the process of compounding leads to accelerating, exponential returns through the years. For example, after 11 years, my initial £20k investment will have produced more than £22k in total returns, doubling my money and then some.
After 40 years of compounding at 7%, I’ll be getting a return in one year that’s close to the initial £20k investment! And the final balance will be worth almost £300k.
|
Years invested |
Return for the year (£) |
Total returns (£) |
Balance (£) |
|
1 |
1,400.00 |
1,400.00 |
21,400.00 |
|
2 |
1,498.00 |
2,898.00 |
22,898.00 |
|
3 |
1,602.86 |
4,500.86 |
24,500.86 |
|
4 |
1,715.06 |
6,215.92 |
26,215.92 |
|
5 |
1,835.11 |
8,051.03 |
28,051.03 |
|
11 |
2,754.01 |
22,097.04 |
42,097.04 |
|
20 |
5,063.14 |
57,393.69 |
77,393.69 |
|
30 |
9,959.96 |
132,245.10 |
152,245.10 |
|
40 |
19,592.75 |
279,489.16 |
299,489.16 |
How I’d beat the effects of inflation
One fair criticism of illustrations like this is that £300k 40 years from now won’t seem as impressive as it does today because of the eroding effects of inflation. And that’s true. But £20k would not be my only investment in a lifetime of investing. Even if I started with £20k, I’d likely add more to my investments through the years. Indeed, my preferred option would be to invest money every month. And doing that would really turbo-charge those returns to produce a much larger pot of invested money in the end.
For example, the calculator tells me that adding £100 each month on top of the initial £20k investment would give me a final balance after 40 years of just over £584k. And I reckon a cool half a million is a decent outcome for what is a relatively modest financial commitment each month.
Another way to improve the outcome is to achieve an annualised return on investments higher than 7%. And like many other private investors, I’m aiming to achieve that by picking shares and funds carefully. Even small increases in the annualised return can multiply out into big differences in the final balance over time. And that happens because of the powerful effect consistent compounding can have. Indeed, compounding is the ‘secret’ of success for many successful investors such as Warren Buffett and others.
