By Tezcan Gecgil, PhD
For many people, investing in shares may initially sound confusing. They may also think that they do not earn enough money to start investing in the stock market.
September has so far has been a buckle-up-and-hold-on sort of month. The resulting volatility makes many investors nervous. But even if we only have little to spare every month, we can all invest. That investment could grow with compound interest over time to a surprisingly large amount. This decline in September could possibly present viable potential opportunities for long-term investors.
Let me first offer some terminology for investors who are just getting interested in the stock market. London has always sat at the centre of global financial markets. As a result, global companies have been attracted to list there. The London Stock Exchange (LSE) is the primary stock exchange in the UK and the largest in Europe.
LSE website describes the FTSE (pronounced Footsie) Group as “an independent organisation jointly owned by the Financial Times and the London Stock Exchange.” It has a wide range of indices that cover cover not only the UK but also other markets worldwide.
The FTSE 100 is the most famous index in the UK. It began in 1984. Most of the 100 companies in the index are multinational conglomerates. Although many of them have UK headquarters, quite a number of the listed businesses have their headquarters in other countries.
The junior index, i.e., the FTSE 250, consists of the 101st to the 350th largest companies listed on the LSE. The FTSE 250 was launched in 1992. Member businesses typically have a more UK-based domestic focus. As a result, they may be affected by shorter-term developments in the UK economy.
2020 is a difficult year
Seasoned investors would concur that over the long run, the stock market returns about 6% to 8% annually, on average. That metric accounts for various market downturns, including occasional crashes.
However, so far in the year, both FTSE 100 and FTSE 250 indices are down over 20%. In other words, they are technically in bear market territory.
On the other hand, if we had looked at the numbers in early January 2020, the indices would have been up around 12% and 25% respectively, over the previous 12 months.
We must note that these increases (or decreases) in the index levels do not include the dividend payments made to company shareholders. Both markets are well-known for relatively high dividends. Average dividend yields for the FTSE 100 and the FTSE 250 are about 4.3% and 3.2% respectively.
We all realize that past performance may not exactly repeat in the months ahead. However, the track records of each index over decades show the growth potential.
May the time be with you
Let’s assume that you are now 30 years old with £10,000 in savings and that you plan to retire at age 65.
You decide to invest that £10,000 in a fund now and make an additional £6,000 of contributions annually at the start of the year. You have 35 years to invest. The annual return is 7%, compounded once a year. At the end of 35 years, the total amount saved becomes £994,246.
Saving £6,000 a year would mean being able to put aside around £500 a month or about £17 a day. Might you just be wondering if you should skip that next impulse purchase?
If you could increase your annual contributions to £8,000, then the total would be £1,290,073
Shares I’d consider
I believe having a long-term strategy is the name of the game in successful investing. As long as you make regular investments over many years, the short-term noise in the markets will not affect your final return much.
As we approach the final stretch of the year, I’d like to point out several names I’d consider buying, especially if there is further weakness in their prices. In the FTSE 100, they include Antofagasta, AstraZeneca, Bunzl, Halma, Mondi, Severn Trent, and Unilever.
In the FTSE 250, I like Britvic, Centamin, Direct Line, Softcat, Tate & Lyle as potential long-term investments.