Every parent wants his or her children to be successful. And, with sound parenting and good advice (plus a whole load of effort on the child’s part), this is a very noble and realistic aim.
However, few parents may realise just how simple it can be for their children to become millionaires. It doesn’t require vast sacrifice or huge amounts of discipline, it just needs a relatively small initial amount invested in shares, topped up with a fiver a week until they turn 18.
That’s all possible because of the effect of compounding, or generating a return on previous returns, as well as the huge potential of the stock market to post far more appealing returns than almost any other asset class over a long period of time.
In fact, the FTSE 100 has risen at an annualised rate of 6.1% since it was created in 1984. Certainly, it may not be a consistent return, with the index having fallen over the last fifteen years for example. However, when it comes to a long period of time, the chances are that the FTSE 100 will deliver very impressive returns – even if it does not always appear as though it will do so.
And, when dividends are added to the capital return of 6.1% since 1984, it equates to an even healthier total return of around 9.6%.
Assuming this total return is replicated throughout your child’s working life (i.e. until they turn 65), they could easily become a millionaire. For example, a mere £400 invested in the FTSE 100 when your child is born will turn into £2,082 by the time they turn 18. Adding on the £5 you invest per week during this period, the total value of their FTSE investment by the time they become an adult is £13,476.
While this is still some way off a cool £1m, as a parent you can now stop investing £5 per week (or any amount) on their behalf and simply allow the FTSE 100 to do the work for you. Of course, the FTSE 100 is made up of companies, so it is the economy and the people who work for the 100+ companies listed on the FTSE 100 who are really doing the work.
Assuming the FTSE 100 continues to post a total return of 9.6% for the next 47 years (i.e. from your child’s 18th birthday until their 65th birthday), the value of their portfolio will rise from £13,476 to just over £1m. That’s without any additional investments and, obviously, without any withdrawals. It assumes all dividends are reinvested and compounding takes place once per year.
Too easy? Clearly, assumptions regarding the future performance of the FTSE 100 may not prove to be accurate but, over a 65 year period, the chances are that they will be something similar to the last 31.5 years. And, while inflation will make £1m in 65 years’ worth a lot less than it is today, the contributions made are so small that many parents may feel they are willing and able to make their children millionaires several times over.