While having £1m in the bank may seem like a distant dream to many people, the reality is that investing a small amount in shares over a long period can make that dream a reality. Starting with just £5 per day, anyone can generate a sum of £1m during their working lives, which could then be sufficient to enjoy a very comfortable retirement.
Of course, £5 per day may not sound all that much. Even over the course of a working life it doesn’t add up to a vast fortune if it doesn’t produce any return. In fact, saving £5 per day over the course of a 45-year period (assuming saving begins at age 21 and ends on retirement at age 66) would lead to a grand total of £82,125 if it was kept under the mattress and produced no interest.
However, by investing that same sum of money in shares, it’s possible to generate £1m during the same time period. That’s because the FTSE 100 has recorded a total annual return of 9.1% since its inception in 1984 and by applying this rate of return each year to the £5 invested each day over the 45-year time period, it equates to a grand total of £1m.
Ups and downs
Clearly, such a high rate of return can’t be guaranteed and in recent years the FTSE 100 has been a major disappointment. In fact, it’s trading around 10% below its level from over 16 years ago. And with the prospects for a Brexit, a slowdown in China and the risk of the US economic recovery being choked-off by rising interest rates, many investors may be tempted to hold cash rather than shares at the present time.
However, to do so could jeopardise the long term returns on the £5 invested per day. That’s because the FTSE 100 has always faced major risks and since its inception it has experienced challenges such as the dotcom bubble, 9/11, the credit crunch and today’s commodity crisis. Despite this, it has been able to generate a return that over a 45-year period would be sufficient to turn £5 per day into £1m. As such, today’s problems are nothing particularly new and in the long run the FTSE 100 is likely to deliver excellent total returns, although volatility may cause some distress in the meantime.
One area that’s therefore important to consider is diversification. The FTSE 100 is clearly hugely diversified and this helps to smooth out the numerous profit warnings, external challenges and strategic errors that companies inevitably face over a long period. As such, it makes sense to invest £5 per day in a number of different stocks that provide a mix of growth and income, while keeping costs down to a minimum through the use of aggregated orders.
By doing so, achieving the goal of being a millionaire may not be so tough. Certainly, the road may not always be smooth, but it’s possible for anyone, no matter what their level of earnings, to benefit from the collective wealth creation of the FTSE 100 and use it to deliver an improved quality of life in their retirement.