Why it’s always a great time to drip £100 a month into the FTSE 100

I reckon compounding and pound/cost averaging could work to drive a decent investing return with the Footsie.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If you have a long-term investing horizon in mind I think there’s a good chance that investing regularly in an accumulation FTSE 100 index tracker fund will give you a better total return than investing money in an interest-paying bank account.

The ‘accumulation’ part of the description means that the dividends you earn from the fund are automatically reinvested back into the fund. If you reinvest your dividends like that, you’ll be on the road to compounding your money, and compounding is key to building wealth.

Smoothing out some of the ups and downs

Right now, the FTSE 100 has a dividend yield running above 4%, which is a better return than many bank accounts pay in interest. That’s a good start. But the value of your invested money will go up and down with the value of the index as the 100 or so shares making up the index fluctuate.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

But if you invest, say, £100 every month, you’ll be able to smooth out some of the volatility because of pound/cost averaging. In other words, when the index cycles down, you’ll be getting more for your money, and when the index cycles up, you won’t be investing all your money near the highs.

Over the long haul, I think your FTSE 100 investment could do well. For example, even in the 10-year period between 2008 and 2017 when there was a lot of volatility in the FTSE 100, it delivered a total return of 74%, which works out at 5.7% a year, beating most bank accounts hands down.

The total returns over the period looked like this:

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

(28.3%)

27.3%

12.6%

(2.2%)

10%

18.7%

0.7%

(1.3%)

19.1%

11.9%

The figures in brackets represent a negative return during the year, so the volatility looks frightening. But even though the index lurched through last decade’s credit-crunch, it still managed that 74% total return over 10 years. Imagine how good the total returns might be if things go well.

The next 10 years could be even better

In the past, the FTSE 100 has trebled in value over a 10-year period and some believe it could do so again. I think the theory is attractive because it makes sense to me that we could be entering a new period of prosperity and economic growth after what has been a long period of economic recovery since the financial crisis around 2008/9.

Imagine what your FTSE 100 investment could look like if the index trebles in value and you’ve compounded your gains along the way by reinvesting the dividends in an accumulation fund.

However, even if the FTSE 100 falls short of that kind of performance in the years to come, I think that the twin weapons of compounding and pound/cost averaging could work to drive a decent investing return if you make regular payments into a tracker fund.

With a 10-year-plus investment time horizon in mind, I reckon it’s always a great time to drip £100 a month into the FTSE 100.

5 stocks for trying to build wealth after 50

Inflation recently hit 40-year highs… the ‘cost of living crisis’ rumbles on… the prospect of a new Cold War with Russia and China looms large, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »