The companies among the ranks of FTSE 100 shares are some of the largest enterprises in the UK. And while there is some debate about investing in real estate versus the stock market, the latter has historically proven to be simpler and more lucrative for most individuals.
Obviously, buy-to-let can be immensely profitable. But it requires:
- Expert knowledge within the property markets
- Enough income to afford sizable mortgages
- A mental map to navigate the labyrinth of taxes
- And active management to find and retain tenants
Investing certainly isn’t a walk in the park either. But it does come with far fewer headaches:
- Expert knowledge isn’t essential when investing in passive index funds
- Cheap trading fees mean lower capital requirements to get started
- Taxes can be entirely avoided by using a Stocks and Shares ISA
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Footsie shares vs being a landlord
Since 1984, FTSE 100 shares have generated an average annualised return of 7.6%, including dividends. That means for every £1,000, investors can realistically expect to earn £76 a year in the long run.
What about buy-to-let? In some regions of the UK buy-to-let can offer a significantly higher renter’s yield, net of taxes. But according to PropertyData, the average across the country is only 4.75%, or £47.50 a year.
Of course, this figure doesn’t consider the potential gains generated from increases in property prices. However, it’s important to remember that, just like the stock market, the property market does have a tendency to crash every once in a while. Not to mention selling real estate can take months compared to seconds for stocks.
That’s why, all things considered, investing in top-notch British businesses is the wiser move, in my mind.
Building wealth in the stock market
With the invention of index exchange-traded funds (ETFs), investors can easily replicate the performance of FTSE 100 shares with minimal effort. While annual management fees are involved, these are typically less than 0.1%, making them largely negligible.
Assuming the UK’s flagship index continues to deliver its average historical return moving forward, injecting just £500 a month for 20 years is enough to start generating around £20,210 in annual passive income from both share price gains and dividends. Not to mention the accumulation of a £280,290 pension pot in the process.
Of course, as with any investment, there are risks. And even the most skilled investor can watch their portfolio derail during a market crash, or correction.
In the long run, the British stock market has a 100% success rate of recovering before reaching new heights. However, depending on the timing of these adverse events, investors may have considerably less than expected. And inexperienced investors who prematurely sell shares in a panic may destroy wealth rather than create it.
Nevertheless, by taking a patient, disciplined approach, investing in FTSE 100 shares through an ETF has generally yielded better results for novice investors versus buy-to-let.
