Past performance may not always be a reliable indicator of future returns. But I think investing in FTSE 100 and FTSE 250 stocks remains a brilliant strategy for long-term investors like me.
These UK share indexes have delivered an average annual return of 7.5% and 11% respectively in recent decades. This translates into a 9.3% return if averaged across both. And it suggests that a regular investment spread across them could build me a substantial nest egg by the time I retire.
It’s important to point out that British stocks have underperformed in more recent years. Further, it’s possible that investors could continue to shun domestic shares if the economic backdrop and political landscape continues remains difficult.
Having said that, more optimistic commentators argue that the current discount on UK shares may soon prompt a buying frenzy. And so returns may actually exceed those historical levels in the coming years.
Taking the long view
Personally speaking, I think it’s a good idea to block out the noise and consider the wise words of Benjamin Graham. The legendary investor (and former teacher of billionaire investor Warren Buffett) once said that “in the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
It’s a concept suggesting that, over a longer-time horizon, a company’s underlying characteristics will become clear and the market will adjust its value accordingly.
This is why I buy UK shares with a view to holding them for the long haul (say a decade or more). And it’s why I believe buying FTSE 100 and FTSE 250 shares remain a sound investing strategy.
Let’s say that the average return of these indexes remains unchanged for the next 30 years. If the long-term average return of 9.3% remains intact, a £400 investment each month would generate a healthy £779,708 over this period.
This sort of sum would give me a £31,188 passive income in retirement, if I chose to draw down 4% of it each year.
2 top stocks on my radar
I’m aiming to build a balanced portfolio of defensive and cyclical shares to build my own retirement fund. And, right now, wind farm operator Greencoat UK Wind is on my watchlist of stocks to buy.
Companies like this can endure some earnings volatility during unfavourable weather conditions. When the wind calms and electricity generation falls, profits can slump. But I’m expecting Greencoat to deliver solid long-term earnings growth as demand for green energy heats up.
And if planning rules for onshore farms are loosened (as many expect), profits here may receive a further shot in the arm.
I’m also looking at adding Associated British Foods shares when I next have cash to invest. Despite fierce competition in the retail sector, I think revenues here could surge as demand for low-cost fashion accelerates.
ABF owns the very popular Primark fashion and lifestyle chain. And it’s rapidly rolling out new stores across the US and Europe to exploit this booming value fashion segment. I also like its nascent investment in e-commerce to capture digital trade, and especially in areas like Click & Collect.
This post was originally published on Motley Fool
