A million pound retirement portfolio can sound like a lofty goal, but I think its achievable using shares and share-backed investments such as funds.
For example, according to online trading provider IG Group, between 1984 and 2019, the FTSE 100 index delivered an annual total return of 7.8% — that figure includes the income from dividends. And I think a similar 35-year performance is possible starting from today with the Footsie. But it’s not guaranteed, of course.
Compounding potential stock market returns
If I were to invest a sum of £500 a month and compound annual total returns of roughly 8%, I’d end up with just over £1m after 35 years. And one way of targeting that kind of outcome would be to invest in tracker funds following the stock market. I might, for example, invest in trackers following the FTSE 100, FTSE 250 and small-cap indices. And I could diversify into other trackers as well, such as one following America’s S&P 500 index or other markets abroad.
Stock market returns and percentage levels can be volatile and they’re never certain. But the first step I’d take in my quest for a million would be to invest regularly in share-backed vehicles for the long term.
However, a million pounds in 35 years’ time will likely have less spending power than a million pounds today. Price inflation is all over the news right now, and it’s become a prominent feature in most people’s everyday lives. So, to combat its ravages, I’d take the second step of increasing the level of my monthly investments whenever possible. For example, I’d raise the monthly figure every time my salary increased. And in that way, the eventual value of my retirement pot has a better chance of keeping pace with inflation.
Two key variables
But key to the success of my programme of stock market investment would be to focus on the process of compounding. The concept means that gains build on earlier gains to really drive forward the value of a portfolio. And two variables can make big differences to the end result.
The first is time. The longer I’m compounding my gains, the bigger the end result, yes. But the biggest absolute annual gains arrive in the later years. So it really is important for me to keep compounding for as long as I can before retiring.
The second variable is the level of annualised gains achieved. And small differences in those gains can compound out to big differences in the end result. For example, if I achieved a 10% annual return instead of 8% and compounded it for 35 years as in the illustration above, I’d end up with more than £1.7m instead of the £1m mentioned earlier.
So, the third step in my quest to achieve a million pound retirement fund would be to seek higher annualised returns from my stock market investments. And to do that, I’d combine my tracker fund investments with the shares of selected individual companies.
There’s no guarantee I’d achieve higher annualised returns. But I’d aim to research companies carefully and invest when valuations look attractive with the goal of mitigating some of the risks that all shares carry.
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Kevin Godbold owns shares in IG Group Holdings. 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.
