Investing in UK shares is a tried and tested method of building long-term wealth. And a common financial goal among investors is reaching millionaire territory. But for many, this milestone seems out of reach, especially for individuals without much capital to spare for investments.
However, it turns out boosting my nest egg to seven figures isn’t as impossible as one would think. And with share prices trading near record lows, courtesy of the 2022 stock market correction, there are countless opportunities available for patient investors today.
Building a £1m portfolio with UK shares
Numerous investment strategies can be used to grow capital. Each has its own advantages and disadvantages. But the method I’ve found to be the most lucrative and least stressful is buy and hold. The concept is simple – invest in a fantastic company and hold onto the shares for the long run. As the business grows, so does the value of my investment.
So what sort of growth rate can I expect? Every company is different. And in some instances, firms can end up underperforming due to internal and, as we’ve seen this year, external factors. However, looking at the FTSE 250, the average annual return, including dividends, stands at around 11.3%.
Compared to the average savings rate in a bank account, that’s pretty substantial. And as it turns out, it can generate significant wealth over the long term. At this level of return, investing £300 a month into UK shares would boost my portfolio above £1m within 31 years – just in time for retirement.
Taking on risks to speed things up
Needless to say, three decades is a pretty long waiting time. And it may even take longer if the stock market goes through another episode of extreme volatility – something that’s more likely than not.
Fortunately, there are methods of speeding up the compounding effect. Option one is to simply increase my monthly contributions. But it’s essential to remember that only money I don’t need for at least five years should be invested. After all, I never want to be in a position where I’m forced to sell shares at a bad price to meet my financial obligations.
That’s where option two comes in. Instead of tracking an index with an exchange-traded fund, I prefer to pick individual UK shares. There’s no denying this approach opens the flood gates of risk.
Portfolio diversification can help mitigate my exposure to volatility. But it doesn’t eliminate the need for thorough analysis and research each week. And even with this, stock prices can still go south due to entirely unexpected factors. Just look at what happened to some of the best travel stocks once Covid-19 entered the picture.
But in my opinion, the risk is worth taking. Why? Because even if I can squeeze out only a few extra percentage points, it can have an enormous impact. Suppose I achieve an annual return of 14%? In that case, the time required to reach £1m with £300 monthly investments is cut by half a decade.