It’s true that the performance of the FTSE 100 has lagged behind the S&P 500 over the past few years. Yet over the long term, the index has provided some exceptional returns from growth stocks. If a 40-year-old was looking to build a portfolio from scratch based around growth ideas, here’s some indication of what things could look like at 65.
Running it back
To begin with, let’s consider how things could have gone in the past. If we rewind to 25 years ago (the investment time horizon for a 40-year-old to retirement, based on the retirement age back then), the FTSE 100 was at 6,658 points. It’s now at 8,220 points. This is just under a 24% return, or less than 1% a year.
This might not seem impressive, but remember this is the entire index, not specifically the growth stocks. For example, over this period technology stocks have done very well. RELX is a good example. The global provider of information-based analytics and decision tools has grown substantially over the past decade as take up of the product from businesses has grown. As a result, the share price is up 577% since 2000, an average of almost 8% a year.
Over the same period, there has been huge growth in the private equity sector. Investing in companies that aren’t currently public has been a source of large profits for firms in this area. For example, 3i Group is one of the largest private equity powerhouses. The boom in this segment has been one factor in the 299% share price rally since 2000, averaging just under 6% a year.
Looking to the future
Although the past doesn’t predict the future, an investor could look at more examples like this and conclude that over the next 25 years, achieving a 6%-8% annual growth rate is a reasonable assumption to make.
Looking ahead, an investor could consider picking an idea that’s in a hot sector now for long-term future gains. Balfour Beatty (LSE:BBY) is a stock I hold that I think fits the bill, with it rallying 26% over the last year.
The global infrastructure group specialises in construction and support services, with strong growth recently in the US and UK. It has the potential to win more contracts in the coming years as new administrations in both countries look to deliver on their pledge to increase infrastructure spending.
This could provide a multi-year boost for revenue. There’s also large potential for growth in Asia, where it has a joint venture with Gammon but hasn’t really got things moving yet.
One risk is that new projects are partially financed using debt. Given that interest rates in the US and UK are staying higher for longer, this can make new borrowing more expensive.
Potential numbers
If an investor could put away £400 a month in FTSE 100 growth stocks and achieve a 7% average return for a 25 years through, the investment pot could be worth a juicy £326k. Of course, trying to forecast this far into the future is very difficult. The final figure could be significantly higher or lower than £326k. But it does provide a good idea of what could be achieved.
This post was originally published on Motley Fool
