I think buying UK shares can be a great way of building wealth. And the best way to do that – in my view – is by investing regularly in great companies when they trade at attractive prices.
Charlie Munger (who would have turned 100 yesterday) said that things get easier after the first £100,000. So here’s how I’d aim to get there with a £1,000 monthly investment.
Quality companies
Warren Buffett credits Munger with demonstrating to him the importance of investing in quality businesses. That’s advice I’d look to implement in my own investing.
The best companies have two things in common. They generate significant amounts of cash and they have the ability to do this for a long time to come.
Fortunately, there are several UK stocks that fit the bill. Two obvious examples (and there are several more) are Rightmove and InterContinental Hotels Group (IHG).
The companies operate in different sectors, but both have terrific business models. As a platform business, Rightmove’s costs are low, while IHG’s franchise model avoids the operating costs of hotels.
Neither is risk-free – Rightmove faces increasingly tough competition and a downturn can weigh on IHG’s earnings. But both are proven operations with terrific economic properties.
The road to £100,000
There are many more examples of quality businesses in the FTSE 100 and the FTSE 250. But how quickly could a £1,000 monthly investment grow into something worth £100,000?
On average, the FTSE 100 has returned 6.5% per year over the last couple of decades. At that rate, £1,000 per month becomes £100,000 surprisingly quickly – within seven years.
Over the last few years though, Munger suggested investors should lower their expectations from the stock market. But a 5% return would extend my timeframe by only a matter of months.
Even if I did better and managed a 9% annual return, it would still take me more than six years to get to £100,000. This illustrates a key point.
The most important thing on the road to £100,000 is saving money and putting it into the stock market. That matters far more than whether my annual return is 5%, 6%, or 9%.
Regular investing
I think it’s surprising how quickly £1,000 each month can turn into £100,000 by investing in the stock market. Even with below-average returns, I think seven years is still reasonable.
Of course, if my investments go down in value — which is a real risk — it will take longer, perhaps much longer. Yet I think I’m being conservative with my returns target.
There are other benefits to investing each month as well. If prices fall in any month, I’d be in a position to take advantage and invest while stocks are cheap.
Munger says the first £100,000 is the hardest and investors can take it a bit easier once they get to that level. But that’s something to think about further down the line.
