Now that the year is almost over, I’m trying to spend some time looking at the bigger picture. Sometimes I can get so caught up in the events of a particular day or week that I ignore my plan for the next year or next decade. It’s true that in 2022 there’s been a lot for investors to digest and deal with. Yet when I zoom out, we’re still following the same economic cycle that has been repeating for centuries. With that in mind, here’s how I think I can make £200k from investing in the FTSE 100 for the long term.
The economic cycle
My strategy relies on the market following the same pattern that it has in the past. This correlates to the different stages of the economic cycle. During a slowdown and recession (such as now), the stock market typically underperforms. Then during the years that follow, the recovery and boom periods see the market rally.
Of course, in reality it’s not that simple. The main difficulty investors like me have is that I can’t predict how long a boom period or a recession will last. I know that both will end at some point, but that stage of the cycle can last for months or years.
Yet because the cycle will continue in the future, my idea of drip-feeding money into the stock market each month makes perfect sense. Some refer to it as ‘pound cost averaging’. In other words, I get an average price of different stocks due to buying more each month at different prices.
The reason why I think this is smart is because during the bad times I get to buy at low prices. During the good times, I get to buy as the stock is rallying.
How I can use the FTSE 100 to my advantage
I want to target mostly FTSE 100 stocks with my regular investment plan. This is because these are the largest UK listed companies and therefore have a proven track record and successful business model.s Stocks like British American Tobacco and HSBC are global titans with a history of profitability.
In order to reach my goal of £200k, it’s going to take me several years. I don’t want to run the risk of a small company going bust over this period. Even though a FTSE 100 company can still go bankrupt, I feel the risk is lower.
Over the past decade, the average total return of the FTSE 100 (including reinvested dividends) is 18.3%. But if I shorten this to five years, the return drops to 4.2%.
I’m going to be conservative and use an average total return of 7% for my £400 a month. Using this assumption, it would take me just under 20 years to hit a portfolio worth £200k. It might take more or less time to achieve this depending on the economic cycle over this period. Yet as decades of data do show, the long-term trend is higher.
The post How drip-feeding £400 a month into the FTSE 100 could make me £200k appeared first on The Motley Fool UK.
Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and HSBC Holdings. 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.
Motley Fool UK 2022