The National Lottery is tempting when we see the opportunity presented by multi-million-pound jackpots. But as lovely as it would be to win, the odds are so low it’s nothing short of a gamble on luck. It amounts to throwing money away, albeit some of which goes to charity. All is not lost though. Investing offers an alternative way to make a million, and many ordinary people have become ISA millionaires. The FTSE 100 index and the FTSE 250 are a great place for investors to build a future nest egg.
Hidden value in the FTSE 100
Stock market investing is a simple yet effective way of building a stable financial future. It allows me the chance to own a piece of a quality business and profit from that business if it does well. Some businesses do so well they become takeover targets, and shareholders are well compensated. There are many quality businesses in the UK. In recent years Brexit has suppressed UK share prices and the pandemic has wreaked havoc on even more. This means 2021 could be a good time to snap up quality FTSE 100 and FTSE 250 shares that have been overlooked.
Of course, there are some risks with stock market investing. The company could fail, and the value of stocks can go down as well as up. However, if I’m very careful with my research and in my stock choices, I think I’ve a good chance of striking it rich via UK shares.
Buy and hold to become an ISA millionaire
The key is to take advantage of compound interest using a buy-and-hold strategy. Some stocks offer dividends to their shareholders. We can find these in the FTSE 100 index and elsewhere. Dividends are like a regular interest payment. If I take my dividends and reinvest them in more shares, then I’m compounding my investment. It’s a very powerful strategy that can quickly accumulate into exponential gains.
The speed at which I can reach my £1m payday depends on three factors. First is how much I can afford to contribute monthly. This obviously depends on my disposable income. Then there’s how much interest I earn annually, which depends on the rate of return on my investment. And finally, there’s how long I can leave the investment to grow.
If I invest £250 a month for 18 years at an effective annual rate of 30%, I would have £1.2m. Two years later and I’d have £2.1m, which shows the power of compounding. However, while some funds have seen returns of 30%+ this year, this can no way be guaranteed as a consistent level of return. It usually involves taking considerable risk to get such a high return.
For more cautious investors, a realistic rate of annual return would be around 6%. Which means it’s going to take larger monthly contributions, a lump-sum investment, or a much longer period to reach the million-pound pot. But with a £25k deposit, followed by contributions of £390 a month for 40 years, and an effective annual rate of 6%, I’d become an ISA millionaire.
And unless a company is about to go under, I see no reason to ever sell the shares. I think buy and hold for as long as you can is the answer. The FTSE 100 and FTSE 250 indices hold some high-quality companies with plenty of value to unlock for long-term shareholders.
Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.