If you want to make a million to fund your retirement, investing in UK shares is a great way to do it. By pumping regular sums into the stock market throughout your working life, you can amass a sizeable pot of money.
The trick is to leave it untouched to grow in value, year after year. So resist the temptation to raid your funds to cover spending, or panic and sell up in a stock market crash. Another thing you should do is invest in a Stocks and Shares ISA, because that way all your capital growth and dividend income is free of tax for life. It’s a huge perk for shareholders.
There’s one more thing you must do. This one is vital, and I’ve just discovered I’m not always doing it. Please take a moment to check you aren’t making the same mistake too. Otherwise it could wreck your plans to make a million, or any other sum, from shares.
Make a million without slipping up
The key to building long-term wealth from UK shares is to reinvest all your dividends for growth. You should not take the money as income until you retire and really need it. Here’s why. Over the 20 years to 31 December 2019, the FTSE 100 index rose just 600 points to 7,542, a rise of just 8.8%.
If you’d reinvested all your dividends, your total return would have been 122%, figures from Schroders show. That’s an astonishing difference.
Dividends were particularly important in this period, because the FTSE 100 delivered such little growth, but it shows their long-term value. By reinvesting every penny, you’re often picking up shares when they’re cheap, after stock markets have fallen.
This means that to make a million you should reinvest every penny you get, but as I’ve just discovered, I haven’t been doing that.
Click to reinvest your dividends
I have money in a low-cost exchange traded fund, iShares Core FTSE 100 UCITS ETF. I thought all my dividends were being reinvested, but then I noticed I had built up a cash balance of £449.34. The dividends were sitting idle in my cash account earning zero interest, rather than being pumped back into FTSE 100 stocks.
This means that instead of buying the index during the crash in March, when it traded 20% lower than today, I bought nothing. That’s no way to make a million.
I’d forgotten to click the button on my trading platform that ensures all my dividends are automatically reinvested back into the stock or fund that paid them.
It took seconds to sort out. I went into the Dividend Reinvestment section, and amended my settings. Now all the money in my portfolio is going to work, rather than sitting idle.
I’m not great with technology, so you probably won’t make the same mistake. It’s worth checking though. It could be the difference between making a million and falling short.
Harvey Jones owns shares of iShares FTSE 100. 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.
Motley Fool UK 2020