We’re in a cost-of-living crisis. Once all bills and other expenditure have been paid out, I have calculated £90 a week is what I can afford to invest in cheap UK shares for a better future.
I am learning from experience and from listening to others, such as the legendary Sage of Omaha, Warren Buffett.
Buffett once said “Someone’s sitting in the shade today because someone planted a tree a long time ago. The biggest mistake is not learning the habit of saving properly.”
He is now worth $100bn. On this basis, I am not going to make the mistake of frittering away my spare cash which he refers to.
£90 a week may not sound like much but in 11 years it would be worth over £50,000, even with no growth at all. Furthermore, if invested in a relatively safe FTSE 100 stock that had a dividend yield of 7%, it would give me £3,500 a year in income.
This income would be tax-free if held in a Stocks and Shares ISA. That sum would pay a good chunk of my annual bills for life, unless the cost-of-living crisis gets even worse!
But most exciting of all is that if invested in a good stock that grows steadily year on year, increasing its dividend along the way, then the £90 a week could create a portfolio worth nearer £100,000 after 11 years.
Therefore the £3,500 from a £50,000 portfolio would be £7,000 tax-free from £100,000. This is not to be sniffed at, especially if invested for an even longer duration.
The thing to remember is that a stock that may look expensive now might look to have been cheap in 11 years’ time. For example I have owned AstraZeneca shares since 2011, 11 years ago, when they were priced at £30 a share. At the time I thought maybe £30 was expensive, but the company continued to do well and grow and are now valued at £108 a share.
With hindsight, they were very cheap indeed and had doubled in value long before Covid-19 came on the scene. I now just wish I had bought more shares, but that’s hindsight for you! The dividends and capital growth have been phenomenal.
What I need to do is find more AstraZenecas. There are probably plenty of them staring me in the face in the FTSE 100 index, and diligent analysis and then buying at the right price is key to success.
The FTSE 100 is looking cheap compared to other major indices around the world. It has a lower price-to-earnings (P/E) ratio than the Dow Jones, S&P 500 and Nasdaq for example.
Okay, this is partly justified as the USA has some truly exceptional success stories listed on its stock markets, such as Amazon, Alphabet (which is the holding company for Google) and Apple, and the Federal Reserve is being tougher on inflation than the Bank of England. But overall, UK shares are looking attractive.
The FTSE 100 sectors I particularly like the look of are Aerospace & Defence, Insurance/Investment Services, Energy, Tobacco, Pharmaceuticals and Banking. I believe there are a few gems in here that could offer the solid long-term growth I’m looking for.