I’m aiming to build a £1m Stocks and Shares ISA. I use multiple strategies to try to reach this goal, one of which involves FTSE 100 shares.
Why the FTSE 100?
The Footsie includes the largest 100 stocks that are listed on the London Stock Exchange. Many of these large-cap shares are mature and established businesses.
Another reason why I’d look at these shares is their dividend yields. On average, they offer around 4% a year in dividends. It might not sound like much, but these regular payments can contribute significantly to an investment’s total return over time.
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In addition, during periods of stock market weakness, dividends have been shown to make an even larger contribution to total returns. As the economy enters a recession, I’d want to own even more FTSE 100 dividend shares.
Reaching for £1m
As a long-term investor, I know that I won’t be able to reach my £1m tomorrow. It will take time. But with a plan, and an insight into stock market history, I’d expect to reach it one day.
Achieving this goal will depend on how much I invest, how long I invest for, and what I invest in.
I reckon the best thing I could possibly do is to start as early as possible. That would either allow me to invest modest amounts or reach my target earlier in life.
For instance, if I started early and gave myself 35 years, I calculate that I’d need to invest just £300 a month. That assumes an average annual return of 10%.
Aiming higher
But how can I achieve 10% a year from FTSE 100 shares when the long-term average is closer to 8%?
The difference between these two figures might sound small. But over time, it will have an impact. I calculate that this 2% a year variation could add an extra five years to my target.
One method I’d use is to pick a smaller selection of high-quality shares. These have certain characteristics that I believe will aid their long-term growth.
For instance, I’d find shares that offer a return on capital employed of over 20%. This metric measures how efficiently a company uses its capital, and it’s often used as a sign of business quality.
Next, I’d look for highly profitable companies that have a sustainable competitive advantage. Popular investor Warren Buffett cites it as a desirable attribute and often refers to this as a ‘moat’.
Finally, I’d like to see a solid balance sheet.
Which shares?
Several FTSE 100 shares stand out to me right now. But bear in mind that I’d need to monitor my portfolio to ensure that the underlying businesses are continuing to move in the direction I want.
Much can change regarding a company’s fortunes. New competitors, products or regulations can all negatively impact businesses.
That said, right now, I’d say these shares meet my criteria: Rio Tinto, B&M European Value Retail, Unilever, SSE, and Taylor Wimpey.
I’d happily buy all five stocks if I had spare funds to start this new plan today.
