Many of us dream of making a million, but that’s as far as it goes. Most of us resign ourselves to the fact it’s not an easy achievement and make do with what we have. However, it doesn’t have to be that way. There’s one tried and tested way to make a million, and that’s through stock market investing and the power of compound interest. The wrath of the pandemic has left quality businesses severely battered. This means cheap UK shares are available to purchase and an opportunity to secure my financial future awaits.
Warren Buffett leads by example
Billionaire investor Warren Buffett is famed for his investing prowess and lifelong commitment to the capital markets. He started when he was a boy and has become the world’s most famous — and arguably most successful — investor. His approach is to buy and hold stocks for years. By purchasing shares in a quality company, he can watch his investment grow as the company does. This technique has worked well for Buffett and many others like him who have followed his lead. Personally, I think it’s a great approach and one that I aim to emulate with my financial goal to make a million.
I’d buy cheap shares today
In the UK, the FTSE 100 and FTSE 250 contain a fantastic selection of top-quality companies that are enduring a tough time. However, Warren Buffett has long since advocated buying shares when good companies are struggling. That’s because it presents a fantastic opportunity to buy cheap shares and kick-start the route to making a million.
I think it’s worth heeding Buffett’s advice and agree that 2020 has exposed many cheap UK shares worth buying for the decade ahead. While we’re still in uncertain territory, with new Covid-19 strains arriving and restrictions back in place, this can’t last forever.
The vaccine rollout is already under way, and more countries are getting on board. The UK hopes to approve further vaccines in the coming weeks, which should rapidly speed up recovery. Meanwhile, governments globally have committed to helping citizens and businesses get back on their feet. This comes at significant cost to central bank balance sheets, but means low interest rates are likely to be the norm for several years to come.
While companies have reduced staff and cut dividends in 2020, the savvy ones will be in much better shape in the future. This could mean they make a strong recovery in the years ahead, particularly if companies reinvest their excess cash in growing their businesses.
Make a million through compounding
The reason it’s possible to make a million through buying shares and holding them has much to do with the power of compounding. For example, imagine I buy 100 shares at a total cost of £7,200 today. Then I earn an effective annual interest rate of 7% on these stocks and top up my investment with another £360 a month. I’d make over a million in 40 years. That equates to personal deposits of £180k and over £822k in interest earned during this time.
The pandemic has halted economic growth and damaged much of what we take for granted. As we head into 2021, we’re unsure of what to expect. However, if we have cash to spare and time to commit to investing, this could be a great chance to get on the road to making a million.