Investing a lump sum of £500 a month into UK shares may not appear to be an excellent way to get rich at first glance.
However, I believe that, over the long term, this approach can yield tremendous results. My calculations show it could be possible to turn a relatively small investment of £500 a month into an impressive lump sum of £1m in just a few decades.
Investing in UK shares
Unfortunately, with interest rates where they are today, investors are going to need more than the average savings account to build a million-pound nest egg.
I think UK shares certainly present the perfect alternative. Historically, stocks and shares have been a volatile asset class to own for a short period, say for two or three years. Nevertheless, in the long run, stocks and shares have produced large positive returns. Indeed, over the last 35 years, the FTSE 250 has produced a total annual return of 12%, for example.
This is the main reason why I reckon UK shares are the best way to turn £500 a month into that £1m fund target.
There are several methods to invest in the market in order to take advantage of the wealth-creating power of equities. This includes buying a basket of high-quality stocks and shares, or investing in the market with funds. I use a mix of both investment funds and individual stocks. I think this allows me to have the best of both worlds.
Stocks vs funds
The easiest way to replicate the performance of UK shares is to buy the whole market. This can be achieved via a low-cost FTSE 250 tracker fund.
Another approach could be to buy an actively-managed investment fund that uses the FTSE 250 as a benchmark. These funds may outperform or underperform their benchmark over time. They can be an excellent way to gain exposure to sectors that might not be comfortable to own directly.
The other option is to buy shares directly. High-quality blue-chip stocks such as Unilever and GlaxoSmithKline have a solid track record of yielding high single- to double-digit returns for investors.
The road to a million
But there’s no fixed method needed to hit the £1m target. I prefer a mix of UK shares and funds, as I’ve noted above. But the overriding goal is, of course, to produce high returns.
On that topic, I reckon my portfolio can yield a total annual return of around 9% per annum. At this rate, I think it would take 31 years to turn monthly investments of £500 into a £1m pot.
So that’s the path I’d choose to hit that £1m target. I think other investors can copy this by following a similar approach of picking high-quality growth stocks and individual investment funds.
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Rupert Hargreaves owns shares in Unilever. The Motley Fool UK has recommended GlaxoSmithKline and Unilever. 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.