FTSE shares: a simple but powerful way to build wealth?
No matter how much (or little) they may be earning now, many people aim to build wealth over the long run. One way to do that is to build a portfolio of different FTSE 100 shares at attractive prices. That can be simple and also effective!
FTSE 100 shares have a certain appeal
The index is made up of the 100 companies listed on the London stock market that have the largest market capitalisation. Membership is reviewed every few months.
What that means is that FTSE 100 shares are generally unlikely to be medium-sized companies in industries undergoing explosive growth that can fuel exponential price jumps.
However, it also means that most (not all) FTSE 100 companies are proven and have been around for a while.
Sticking to the known and proven
That is why I see well-known, blue-chip FTSE shares as a promising hunting ground for people who want to try and build wealth.
That can be as easy as drip-feeding money in regularly to a carefully chosen portfolio of such shares, or investing in a tracker fund.
How to build wealth
Doing that, there are two ways that an investor could hopefully earn money over the long term.
One is through price growth. This year has seen the FTSE 100 index hit new all-time highs. It is now 42% higher than five years ago.
Over time, share prices can move up and down. But, as a collection of the stock market’s leading firms, I expect the FTSE 100 to act broadly as a barometer of the British economy.
Another way in which buying FTSE shares can reward. investors is through dividends. While the US S&P 500 index currently offers an average yield of 1.2%, the FTSE 100 average yield is almost triple that amount.
The power of long-term investing
By putting in money regularly, an investor of modest means can build wealth. For example, imagine that between share price growth and dividends, that investor can achieve a compound annual growth rate (CAGR) of 6%.
By investing £300 a month at a CAGR of 6%, within 25 years a portfolio could go from zero to over £173,800.
To start, a practical first move would be to set up a share-dealing account, Stocks and Shares ISA or download a share-dealing app.
Aiming high
Could an investor achieve a higher CAGR than 6% from FTSE shares?
I think so. Consider one share I bought this year, plant hire firm Ashtead (LSE: AHT).
Its dividend yield of 1.8% is below the FTSE 100 average. But, over the past five years, the Ashtead share price has moved up 66%.
Past performance is not necessarily a guide to what will happen in future. Risks for Ashtead include an uncertain economic outlook in its key US market. If that leads to lower levels of construction activity, it could hurt Ashtead’s revenues and profits.
But the company is highly cash generative, has a proven business model and is actively seeking to keep growing its business. It has a large repeat customer base, some of whom have been clients for many years already. I see it as a share investors should consider.
The post FTSE shares: a simple but powerful way to build wealth? appeared first on The Motley Fool UK.
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C Ruane has positions in Ashtead Group Plc. The Motley Fool UK has recommended Ashtead Group Plc. 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.
