You really can grow an investment pot of money worth at least one million pounds by investing £500 per month in UK shares.
But when you look at the recent stock market plunge caused by the coronavirus pandemic, you might find that hard to believe. Indeed, there have been many setbacks for the stock market over the years.
But, over the long term, shares in aggregate have delivered decent, high-single-digit-percentage annual returns.
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!
UK shares beat other classes of asset
I reckon shares are the best horse to back when it comes to building a fortune. And a 2019 study by Barclays came up with some convincing statistics to back up the argument.
The study looked at the very long-term period from 1899 to 2018 and found some interesting evidence about which class of asset delivered the best investor returns.
Barclays found that £100 invested in cash in 1899 would be worth just over £20,000 today. That sounds impressive. But don’t forget how all those years of general price inflation will have eroded the true spending power of the money. Gilts came out better. £100 invested in 1899 would be worth £42,000 today.
But the star of the show was the performance from shares. The returns have been light-years ahead of those other asset classes. If you’d bunged £100 into shares in 1899, you’d be sitting on a cool £2.7m today. That’s an inflation-busting, life-changing, millionaire-making amount of money by any measure.
One of Barclays’ conclusions in the study is that “over time, equities in the UK and the world as a whole tend to generate positive returns, despite some short-term corrections.”
And there’s been a fair amount of research published that suggests long-term investors can expect annualised total returns measured in high single-digit percentages. I’ve seen numbers such as 8% and 9% suggested.
Be a millionaire in retirement or before
But Barclays’ study covered a period of 119 years, and I’m not suggesting you invest for as long as that to turn £500-a-month into a million! However, the State Pension age in the UK is set to rise to 68. If you start investing around your late twenties, for example, you’ll have around 40 years to accumulate that £1m investment pot for your retirement.
I put some figures into an online compound interest calculator with some interesting results. The calculator computed that saving £500 per month for 40 years while earning an annualised return of 7% would deliver a sum of just over £1.2m.
And during that time, your £500 monthly payments would add up to a total contribution of £240,000. However, the total money earned in returns would be just over £1m. It’s amazing how compound gains can grow your money even on a rate of return as low as 7%!
Of course, you can speed up the journey to a million by raising your monthly payments to keep up with inflation. And you can accelerate it further by increasing the rate of annualised return. Many investors aim to do that by carefully picking shares and funds to beat the performance of indices such as the FTSE 100.
