Should I invest in UK shares or Premium Bonds? I think there’s a clear-cut winner.
Premium Bonds are the nation’s favourite savings product. Over 22m Britons save a whopping £119bn in them, according to MoneySavingExpert‘s presenter Martin Lewis. The biggest lure is the pair of £1m prizes awarded to two lucky people each month. However, I reckon I’m more likely to secure a seven-figure sum by investing in UK stocks instead.
So here’s how I’d aim for a million with £50k to invest.
Premium Bonds
Premium Bonds are essentially akin to a savings account with a twist. I own some, but in the context of my asset allocation, I treat them like cash.
Each bond costs £1 and individuals can invest up to a maximum of £50k. Rather than offering a guaranteed return, bonds are entered into a random monthly draw with an annual prize fund rate of 3.3%.
The vast majority of bonds won’t win anything, but with some luck, I could secure tax-free prizes from £25 all the way up to £1m.
But how likely am I to win a million? The current odds of bagging the top prize are an eye-watering one in 59bn per bond.
My chances of winning some smaller prizes with £50k invested are fairly good, but the idea of becoming a Premium Bonds millionaire is a pipe dream. I’m more likely to lose money in real terms due to the corrosive impact of inflation.
UK shares
So how do UK shares compare? Well, they’re a different proposition. The stock market is volatile, so I only invest with a long time horizon in mind. Share price fluctuation means my portfolio can plummet in value over short periods.
However, over long periods, the FTSE 100 index historically returned between 6% and 8% a year. Although there’s no guarantee future returns will match this, the argument for investing in riskier assets like stocks becomes more compelling the longer my investment horizon is.
I could mirror the blue-chip benchmark’s returns by investing in a tracker fund, like the Vanguard FTSE 100 UCITS ETF.
Index trackers have a place in my portfolio, but my preferred strategy is buying individual shares. This potentially allows me to beat the average Footsie returns, but there’s always the risk my investments could underperform.
For instance, UK shares I own include aerospace company Rolls-Royce, pharmaceutical giant AstraZeneca, and housebuilder Taylor Wimpey.
On a 12-month basis, these stocks returned +58%, +14%, and -18% respectively. Those figures highlight the risks and opportunities that come with investing in the stock market.
How I’d aim for a million
I only buy stocks when I’m happy to lock money away for the long-term. For my emergency fund, I stick to cash or premium bonds due to the volatility risk associated with shares.
Let’s imagine I secured an index-beating 9% compound annual growth rate on my investments. That’s not guaranteed and I could fall well short of this goal, but it’s a good ambition to model my calculations against.
With £50k to invest, I’d have a £1m portfolio in just under 35 years! If I bought Premium Bonds instead, in all likelihood I’d still be waiting patiently for the million-pound prize 35 years later.
