Many years ago I read a story of a government somewhere that reckoned the UK owed them some gold for some historical reason, and they wanted it back with interest. The obvious flaw there is that you don’t get interest on gold, you just get the value of the stuff at the time you choose to sell it. That’s part of the reason it’s not so easy to become a millionaire by investing in gold — you’ve got nothing for compounding to work on.
Now, quite a few of the world’s millionaires will have invested heavily in gold this year. But that’s to protect the millions they already have. They won’t have accumulated their wealth in the first place by buying gold.
Saying that, your likelihood of achieving millionaire status from an interest-bearing investment is not that high either. You might stand a better chance than with gold, but probably not much better. Take a Cash ISA, for example. ISA interest rates are all messed up right now thanks to the Covid-19 crisis, so let’s think back to the heady days of 2019 when the world seemed a lot simpler.
Cash ISA? No thanks
Inflation was running at around 1.8%. Most Cash ISA rates were lower than that, at around 1.5%. If you were able to invest £1,000 per month in a Cash ISA, every month without fail, it would take you 55 years to accumulate a million pounds at that rate. Even then, inflation would have ruined the result. The sad fact is that a Cash ISA, when interest rates are lower than inflation, will lose you money in real terms. Even gold has been keeping ahead of inflation lately.
It’s got to be a Stocks and Shares ISA for me, with a combination of dividends and share price gains. Dividends have also been badly affected this year. But I think it’s a great time to buy fallen shares and lock in better future dividend yields.
The UK stock market has returned an average of around 4.9% per year, above inflation, over the long term. So that’s approximately 6.7% in total. £1,000 per month compounded at that rate would get you to a million in 29 years, which is a far more achievable timescale. And to earn your million after inflation, it would take 34 years.
Best way to beat gold
But which individual FTSE 100 shares would I buy to beat gold? British American Tobacco is on a forecast dividend yield of 7.5%. That would get you to a million in 27 years, even with no share price appreciation. BP has cut its dividend, but it’s still on a forecast yield of around 8% — 26 years for a million at that rate.
GlaxoSmithKline is on a yield of 5.4%, which would put your millionaire day 33 years in the future. But, again, that’s on dividends alone and ignores any share price gains. I’m quite sure Glaxo shares will gain in value over the next couple of decades too, getting you to your million that much quicker.
Think about all the companies that have suspended or reduced their dividends this year, but are already showing signs of bringing them back. It makes sense to me to buy FTSE 100 stocks now, while they’re down, and completely forget about that shiny gold stuff.