My Stocks and Shares ISA is packed with stocks that are listed on the FTSE 100.
Like legendary investor Warren Buffett, I think large blue-chip stocks are a great and reliable way to generate long-term wealth. The performance of Britain’s premier share index in recent years reinforces the wisdom of such an investing strategy.
Long-term wealth
According to trading provider IG, the FTSE 100 has delivered an average annual return of 7.38% over the past 10 years. This figure assumes that dividends are reinvested. If the Footsie were to provide this level of yearly return going forwards I could stand to make a big pile of cash.
Let’s say that I have a spare £250 to invest in FTSE index shares each month until I retire. If I were to invest this regularly for 30 years — and to reinvest any dividends I received — I’d have made a generous £303,515.
A big sum like this could eventually give me an excellent passive income to live off. Let me show you how.
We’ll assume that, after those 30 years, I decided to invest that £300,000+ in dividend stocks. If I bought shares with a 6% dividend yield I could make a yearly passive income of £18,211.
Compound miracles
I love investing in FTSE 100 shares because I can make a healthy additional income without having to spend a fortune.
This reflects the miracle of compound interest. By reinvesting the dividends or interest I receive from Day 1, I can turbocharge my wealth by earning additional interest on this as well as on the FTSE 100 shares I buy each month.
I’ll use that £303,515 that I made in the above example to show how this works. Some £90,000 of this is what I’d have spent to acquire FTSE 100 shares over those 30 years. The remaining £213,515 is the pure profit I’d have made through the wonder of compounding.
How I’d try to beat the FTSE 100
By hitting that 7.38% FTSE 100 average annual return, I could significantly boost my wealth then. But I think that through individual stock-picking I can make an even better return.
I’m aiming for an average yearly return of 10% and above. And the stock market correction in 2022 gives me an improved chance of hitting this target. This is because I can buy cheap UK shares today and watch them soar in value during a recovery.
During the 2010s, thousands of investors became stock market millionaires. They bought beaten-down UK shares around the time of the 2009 financial crisis. And they made money as the global economy bounced back and share prices soared.
I hope to replicate their success. It’s why I’ve bought fallen FTSE 100 shares like Ashtead Group, Rio Tinto, Bunzl and Persimmon in 2022. I accept that my plan my face some setbacks and I could lose money as well as make it. But I feel confident, and it’s why I plan to continue building my portfolio with top Footsie shares, despite the uncertain economic outlook.