If I had £10k in savings that I wanted to invest for the long term, the stock market is an incredibly appealing place to start. The largest public companies in the UK are included in the FTSE 100 index. By looking at the past as well as considering the future, here’s how I’d try and increase my investment by ten times.
How to make use of the index
To begin with, there are two main ways that I can invest via the FTSE 100. I could take a passive approach and put my money into a tracker fund. This would replicate the performance of the index over time. The benefit of this is that I cut out the risk of missing out on the gains of a particular company. However, the risk is that I can’t exclude any companies, even if I don’t want to invest in that specific one.
Alternatively, I could select specific stocks within the FTSE 100 and more actively pick and choose. This could be good as I can potentially outperform the benchmark returns of the index. Of course, I could do worse than the benchmark. I am also exposed to more risk as I’m allocating my money between a much more concentrated portfolio of shares.
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When I weigh everything up, I prefer to use the FTSE 100 to my advantage by picking individual companies. I feel I can reduce some of my risk through diversification, by holding a selection of 6-12 companies. This means that I’m not overly reliant on just one or two firms doing well.
Specific stock ideas
Part of my portfolio will be constructed using stocks that have a strong track record. For example, over the past decade, which companies would have achieved the results (10x) I’m looking to replicate over the next decade?
Some examples are the London Stock Exchange Group, Halma, and Melrose Industries. These stocks are now much larger and in a more mature phase of growth. Yet I still believe they can continue to offer strong returns going forward.
The other angle is to look for companies that might not have performed that well in the past, but have great potential going forward. To this end I’d add Marks & Spencer and Rolls-Royce. Both stocks are down over a five-year time horizon. Yet, over the past year, both are up over 60%. This shows me that there has been a momentum change.
If both stocks can compound share price growth at 60% for the next decade, I’d massively eclipse my target.
Points to note
When trying to forecast how my £10k might perform over the next decade, there are a lot of assumptions that have to be made. This is a large risk.
Although I can note the share price performance from the past, it doesn’t mean this will be replicated in the future. Underperformance from any stock I own could mean that my profit over time is less than expected.
Another point is that if we have a recession in the coming year, it could stunt the growth of my portfolio for a while.
Ultimately, I do believe that I can make strong returns from FTSE 100 stocks if I manage the risk appropriately.
