Warren Buffett was once asked “how do you become a millionaire?” He famously answered: “Make a billion dollars and then buy an airline.“
I’m not going to pretend it’s easy to make a million, and if you’re getting on in years and haven’t started investing yet, then you’re unlikely to achieve it unless you’re very very lucky.
No, I’m just going to talk about the way that investing in partial ownership of public companies can give you the best chance of beating that magic mark. And the best way I can think to start is the revelation that if you’d invested £100 in the UK stock market in 1945 and reinvested all your dividends in new shares, today you be sitting on a stunning £180,000, even after inflation.
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Long-term study
That tidbit was unearthed in Barclays’ annual Equity Gilt Study, which compared the performance of shares against gilts and against cash in a savings bank, all the way back before the start of the 20th century. It found that over rolling 18-year periods, shares came out tops every time — even during the 1929 Wall Street crash and the 1930s depression.
So how long do you actually need to make a million?
Let’s say you start at the age of 20 with a target of retiring at 60, and you manage an annual return from shares of 6% per year (which is entirely plausible). You’d need to invest around £525 per month. That would very likely be too much when you’re starting out at a young age, but if you’re in any kind of professional role with decent prospects, it could fall within the bounds of possibility before too many years.
And if you ramp up your monthly savings every time you get a salary rise, you could be investing a lot more than that surprisingly soon.
You could quite easily get a better return than that — 8% per year would net you your million after 34 years, and 10% would bring that down to 30 years. Wouldn’t you love to be sitting on a cool million at the age of 50? Can shares really do that?
Some examples
Unilever would have turned a one-off £10,000 investment a decade ago into £21,800 today — and that’s only the share price. You’d have had dividends too, and if you’d reinvested those every year in more Unilever shares, that would have added around an extra £8,000 to the pot.
Shares in drinks giant Diageo have done even better — the share price itself would have turned that £10,000 into £24,600, and reinvested dividends would have bumped that up to around £33,000.
And with its bigger dividends, British American Tobacco shares would have multiplied that £10,000 into a total of around £35,000.
Obviously, some shares have done better than this and some have done worse — and before you plonk down your cash, it’s a good idea to learn how to spot likely losers. But I’ve deliberately chosen three boring but safe FTSE 100 consumer companies to show that you don’t need any big get-rich-quick winners to get yourself on your way to a million.
There are plenty of other strategies, and investors often do well buying FTSE 100 shares that have fallen each year in the hope of recovery. Others go for the biggest companies, while still others focus on those paying the highest dividends. But whatever approach you do choose, when should you start? How about January 2018?
