The second quarter of the year (covering April, May, and June), was a great time frame for many shares listed on the London Stock Exchange. During the quarter, the FTSE 100 and FTSE 250 indexes were up over 8% and 12% respectively. As I write, July is beginning on a slightly downward note. And the City is debating whether broader markets may face declines in the coming weeks.Â
Given the increase in the number of new Covid-19 cases worldwide and the worry over increased economic contraction, it’s likely we may see some profit-taking in FTSE 100 shares. Yet I believe such a decline may create an opportunity, especially for long-term investors. History tells us that, eventually, economies recover and robust shares go on to hit new highs.Â
The magic of compound interest
Worried about retirement? You’re not alone…
For many people when they can retire might just might depend on when they can afford to do so comfortably. Therefore, it’s important to start building a retirement nest egg as early as possible. Today, I’d like to discuss how even if you only have a few pounds to spare every week, you can invest in FTSE 100 shares. And your money could grow with compound interest over time to a surprisingly large amount.Â
Let’s assume that you’re now 30, with £10,000 in savings and that you plan to retire at age 65. You decide to invest that £10,000 in a fund now and make an additional £4,000 of contributions annually at the start of the year. You have 35 years to invest. The annual return is 6%, compounded once a year. At the end of 35 years, the total amount saved becomes £3549,344.
Saving £4,000 a year would mean being able to put aside around £335 a month, or about £11 a day. Might you just be wondering if you should skip that next impulse purchase or cup of coffee?
And if you were to increase the amount of annual contributions from £4,000 to £7,000, the total amount saved becomes £5903,706. And, finally, if you could increase the contribution to £10,000 a year, then you’d have £1,258,069. That would be the power of time and compound interest at work together.
Investing in FTSE 100 shares
The most famous index in the UK is the FTSE 100 which began in 1984. Most companies in the index are multinational conglomerates. In addition, the FTSE 250 index consists of the 101st to the 350th largest companies listed on the LSE. It was launched in 1992. Companies in it usually have a more domestic focus.
Year-to-date, the FTSE 100 and FTSE 250 are down about 20% and 22% respectively. Yet, I must highlight these declines in index levels don’t include the regular dividend payments made to shareholders. In 2019, average dividend yields for the FTSE 100 and the FTSE 250 were about 4.5% and 2.8% respectively.
There are several companies with respectable dividend yields I’d consider buying in July, especially if there’s any further weakness in their share prices. In the FTSE 100, they include AstraZeneca, BAE Systems, BHP, British American Tobacco, Flutter Entertainment, Reckitt Benckiser, Rio Tinto and Tesco.
In the FTSE 250, I like Drax, Centamin, IG Group, Moneysupermarket.com, Paypoint and Tate & Lyle as potential long-term investments.
Seasoned investors would possibly agree that the best strategy to achieve the retirement you want is to start planning and investing early.