The FTSE 100 has fallen more than 9% since racing past 8,000 in February, and loads of shares look cheap right now. This presents a great opportunity for far-sighted investors to buy UK companies at reduced prices and build substantial long-term wealth.
It’s good to aim high in life and it’s possible to build a million-pound portfolio using the annual Stocks and Shares ISA allowance, even with a relatively low initial commitment of £10 a day.
That may sound pie in the sky, but here’s how.
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Making a million is possible
The last 20 years haven’t been great for the FTSE 100, but it’s still delivered an average total return of 6.89% a year. Over the long run, it’s closer to 8%, assuming dividends reinvested. Someone who invested their full annual £20,000 ISA allowance into a lead index tracker and generated 6.89% would be a millionaire in just under 22 years.
If they chose their own stocks and generated a superior return of 9% a year, they’d get there roughly three years earlier.
Most of us can’t afford to put away £20k a year. Yet making a million is still doable with £10 a day, which works out at £3,650 a year. With 6.89% average growth, my calculations suggest it would take just over 35 years. I’d knock four years off that if I did some stock picking and generated a higher total return of 9% a year.
These figures also assume I increase my contribution by 5% a year to maintain its value against inflation. The obvious problem is that making a million in this way takes two or three decades. This is fine for investors in their 30s, not so good for late starters.
However, I think recent FTSE 100 underperformance gives me an opportunity to accelerate this timescale. That’s because a heap of terrific businesses are currently trading at large discounts to their intrinsic value.
Lots of big name blue-chips are now trading at between four and eight times earnings today. That’s well below the 15 times traditionally seen as fair value.
Better still, many yield as much as 8% or 9% a year. Even with modest share price growth, they could help me generate an average total annual return of 12%, or more. By using a Stocks and Shares ISA, there’s no tax to pay on the income or growth.
Buy and diversify
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As we’ve seen lately, UK shares can be volatile. Buying individual stocks may increase the potential rewards, but the risk rises too. I would get round this by building a diversified portfolio of shares across different FTSE 100 sectors.
Some of my cheap stock picks may turn out to be value traps that never recover their lost value. I’d therefore conduct due diligence to check growth prospects, earnings sustainability, competitor challenges and underlying problems, such as high net debt.
Now’s a great time to go shopping for cheap FTSE 100 shares, and I don’t want to waste it. Even if I never make that million, I should still end up richer than if I never try.
