How I’d invest £20,000 in FTSE 100 shares to aim for a million

Despite being UK-based, the FTSE 100 index is home to many global businesses. In fact, over 80% of the FTSE 100’s sales are from overseas.

Their sizes range from around £4bn to a whopping £178bn. And six of the shares on the index have market capitalisations over £100bn.

FTSE 100 resilience

One thing to bear in mind is that the Footsie has significant exposure to financials, staples, and energy sectors. And only 1% of it is made up of technology companies.

Despite being left behind in the tech boom over the past two decades, it has held up remarkably well. It even achieved a similar performance to its US counterpart, the S&P 500.

Given its resilience, geographic exposure, and diversification, I’d certainly invest in the FTSE 100 in my Stocks and Shares ISA.

Miracle of compounding

On average, the long-term stock market return is said to be around 10% a year.

If it doesn’t sound like much, let’s consider what happens over time. Based on the average return, if I invest £20,000 in FTSE 100 shares, it could grow to around £32,000 in five years.

But if I keep it invested for far longer, I should benefit from the mathematic miracle of compounding. Even without adding any more of my money, I calculate that in 42 years, I’d have reached over £1m.

That would make for a comfortable retirement, in my opinion. It’s enough to withdraw at least £40,000 a year in dividends.

If I’m too eager to wait until then, I would consider adding fresh funds to my ISA every year. I calculate that by adding £20,000 every year and investing in FTSE 100 shares, I should reach my million-pound target in just 19 years.

Which shares?

For now, let’s say I’m just making a one-off £20,000 investment. What should I buy?

First, I’d invest half of the sum, so £10,000, in a FTSE 100 index tracker fund. As the name suggests, this instrument aims to track the performance of all 100 companies.

This is a low-cost way to invest in a diversified group of shares.

Next, I’d allocate the final £10,000 to a handpicked selection of my five favourite shares. I’d consider £2,000 for each one.

Picking individual stocks can involve more risk as much can change over time. New competition or technology can disrupt business models. That’s why I’d need to monitor my selection.

There are ways to mitigate some risks though. For instance, I’d spread my selection across several industries to avoid putting all my eggs in one basket.

I’d also look for a strong competitive advantage that enables consistently large profit margins. It’s what popular investor Warren Buffett calls a moat.

Right now, if I had the spare cash to allocate to a long-term investment, I’d choose the following FTSE 100 shares: Rio Tinto, Persimmon, BP, RELX, and Astrazeneca. By owning quality shares with strong business models, I’d expect to reach a million much earlier than planned.

The post How I’d invest £20,000 in FTSE 100 shares to aim for a million appeared first on The Motley Fool UK.

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Harshil Patel has positions in Bp P.l.c. The Motley Fool UK has recommended RELX. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.