Can I become a stock market millionaire by investing just £10 a day in the FTSE 100 index?
Yes, I believe so. However, confining equity investments solely to the UK’s leading benchmark has both advantages and disadvantages. Accordingly, there are important considerations to bear in mind when aiming for a seven-figure portfolio from FTSE 100 shares alone.
So, let’s explore the Footsie’s potential to create long-term wealth as well as some additional considerations for investors like me today.
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Diversification
Spreading risk across multiple companies and sectors via portfolio diversification is generally regarded as a prudent strategy.
Investing £10 a day in a FTSE 100 tracker fund might be a good way to achieve this. In doing so, investors gain exposure to the largest 100 firms listed on the London Stock Exchange (LSE) measured by market cap.
Although this might be more diversified than a portfolio containing just a handful of stocks, it’s worth noting that LSE shares only account for around 4% of the global stock market’s total value. The FTSE 100 makes up even less.
Plus, the index is especially concentrated in particular sectors, including oil and gas, banking, retail, insurance, and tobacco. There’s a notable lack of tech stocks, which may be a concern for some investors.
Dividends
While some may uncharitably describe FTSE 100 companies as ‘dinosaur’ businesses, there are attractive features for investors to consider too.
Passive income is a key one. With a higher dividend yield than the S&P 500, the Footsie has plenty to offer investors seeking regular cash payouts.
At present, the average yield across FTSE 100 stocks is a healthy 3.9%. Historically, dividend distributions have been a crucial source of returns.
Indeed, the index’s points performance has been pedestrian in recent years. However, via dividend reinvestments, FTSE 100 investors would have made around a 7% return per year over long time periods.
A million-pound portfolio
Past performance doesn’t guarantee future results and low or negative returns can’t be ruled out. However, I think it’s reasonable to use history as a guide for modelling purposes.
Arguably a forecasted 7% annualised return isn’t too outlandish considering the FTSE 100 looks cheap today compared to other major stock market indexes. After all, the benchmark has a price-to-earnings (P/E) ratio of just 9.2.
On that assumption, an investor could potentially become a stock market millionaire in less than 44 years by investing £10 a day in the index, making a little over £160k in total contributions.
That’s encouraging news for a 20-year-old with a long investment horizon. However, some investors might prefer to adopt more risk in pursuit of faster growth.
Beyond a FTSE 100 tracker fund
If investors are prepared to potentially sacrifice some diversification and assume greater volatility exposure, investing in a combination of a FTSE 100 index fund and individual stocks could merit consideration.
For instance, I concentrate some of my own portfolio in certain FTSE 100 stocks such as pharma giant AstraZeneca and mining conglomerate Rio Tinto. In addition, I have positions in leading US tech stocks like Alphabet and Microsoft.
But, I also own index funds. Investing rarely demands an ‘all-or-nothing’ approach, so there’s nothing to stop investors from using multi-faceted strategies when aiming for a million.
