Investing in the stock market can be a wild ride at times. But make no mistake, owning UK shares can build significant wealth for investors who take a long-term view.
According to investment firm Vanguard, the average yearly return from British stocks sits at 9.18%, unadjusted for inflation. Even adjusted for inflation it sits at an impressive 5.35%.
Both figures beat the returns from savings accounts and bonds by a comfortable margin, as the table shows.
Total returns between 1901 and 2022
Asset class
Nominal return
Real (inflation adjusted) return
Cash*
4.55%
0.87%
UK bonds
5.14%
1.44%
UK shares
9.18%
5.35%
Past returns are no guarantee of the future, of course. But the performance of UK shares shows I could potentially unlock a substantial passive income stream without having to break the bank.
Let’s say I have £400 available to invest each month. That could be enough to help me establish a second income of £21,473 for the rest of my life. Here’s how.
A FTSE 100 strategy
Investing in FTSE 100 shares could be the strategy to help me achieve this goal. The UK’s leading index is packed with market-leading, multinational companies with great growth records. On top of this, Footsie stocks are known for providing consistent and generous dividends.
Between its inception in 1984 and 2022, the FTSE 100 delivered a staggering return of 1,514.92%. That combines both price gains and dividends, and works out at an annual average of 7.48%, according to IG Group.
Let’s assume the FTSE keeps on delivering this average return for the next 30 years. What would this transform a regular £400 monthly investment into?
FTSE 100
5 years
£28,995.78
10 years
£71,093.32
20 years
£220,948.85
30 years
£536,824.97
As the table shows, investing in blue-chip shares would build me a huge nest egg worth £536,824.97. That’s thanks to the miracle of compounding, in which I would reinvest dividends over those three decades to buy even more shares and receive even more dividends.
The graphic below shows the powerful impact of this mathematical miracle on building long-term wealth.
Created with thecalculatorsite.com.
Now let’s transfer that into a passive income by using the 4% drawdown rule. This would allow me to draw a retirement income for 30 years before the well eventually runs dry.
Using this withdrawal strategy would provide me with a healthy annual passive income of £21,473.
Reward vs risk
Of course the prospect of making a five-figure income while doing nothing is very enticing. But it’s important to remember that share investing isn’t a risk-free endeavour and positive returns are never guaranteed.
A prolonged period of high inflation and elevated interest rates, for instance, could harm the profits I make. So could economic slowdowns in major economies like the US and China. Finally, rising geopolitical tensions may also hurt my returns if trade frictions flare up and conflicts emerge.
However, I think these risks are worth taking. As I’ve demonstrated, investing in UK shares can create life-changing wealth and hasten the path towards financial independence. It’s why I plan to continue building my own stocks portfolio in 2024.
The post How I’d invest £400 a month in UK shares to target a £21,473 annual passive income! appeared first on The Motley Fool UK.
Amazing Nerd Stock smashes FTSE with 1,346% gains
What makes this company so extraordinary?
It has a cult-like following of nerdy fans who tend to spend lots of money…
…potentially handing investors market-beating gains in any economy.
Though past performance does not guarantee future results, last year, this amazing company saw:
Double-digit revenue growth – to a total £470,800,000
Profits explode 46%
Insiders buying a monster £492,000 of shares
…Setting investors up for – what could be – another decade of spectacular returns.
Want to consider joining them?
Then grab this special report: ‘One Top Growth Stock from The Motley Fool’ which includes both the risks and opportunities.
Secure your FREE copy now
setButtonColorDefaults(“#5FA85D”, ‘background’, ‘#5FA85D’);
setButtonColorDefaults(“#43A24A”, ‘border-color’, ‘#43A24A’);
setButtonColorDefaults(“#FFFFFF”, ‘color’, ‘#FFFFFF’);
})()
More reading
3 FTSE 100 and FTSE 250 value stocks I’d buy for my Stocks & Shares ISA!
2 FTSE 100 and FTSE 250 growth stocks I’ve bought for my Stocks & Shares ISA!
What will happen to the stock market in 2024? Here’s what the experts say
£10,000 in savings? I’d follow Warren Buffett and buy dividend growth stocks
The Barclays share price plummeted 6% this week. Should I be concerned or buy more?
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
