Right now, many UK shares appear to be trading at a huge discount to their peers in the US. There’s no clear explanation why. But with inflation getting back under control and interest rates stabilising, 2024 could be the year where that quickly changes.
If this is indeed the year of recovery, snapping up these bargains right now could be the key to building a significantly larger nest egg in the long run. It could even venture into seven-figure territory by drip-feeding just £5 a day. Here’s how.
Save and invest
Putting my excess cash in the bank is almost always a good idea. But throwing all my net worth into an interest-bearing savings account, even at today’s rates, leaves a lot of money on the table. After all, when looking at the FTSE 250, UK shares have historically offered 11% annualised returns just by owning an index fund. That’s nearly double what some of the best savings accounts are offering right now.
So once an investor has built up an appropriate emergency fund with a bit extra to cover short-term expenses, the rest can go into the stock market, in my opinion.
What to expect in returns
In the grand scheme of things, investing £5 a day isn’t a huge sum to work with. After all, it’s the equivalent of around £150 a month, or £1,825 a year. Yet, despite common belief, this is more than enough to get the ball rolling, especially when operating on a long-term time horizon.
High-interest savings accounts are currently offering returns of around 5% and, as previously highlighted, a FTSE 250 index fund could achieve roughly 11% returns if it continues to follow historical trends. Unfortunately, the latter is far from guaranteed. Truth is, the returns produced by the UK’s mid-cap index could be significantly lower, especially if another economic storm emerges.
This is where stock picking enters the mix. This route certainly isn’t for everyone. But it puts investors in the driver’s seat of their portfolio, opening the door to potentially chunkier market-beating returns at the cost of added risk.
A poorly planned or executed strategy can spectacularly backfire. But for those with the right temperament and discipline, it’s possible to yield superior gains. And thanks to compounding, even an extra 1% can lead to an enormous difference in the long run.
| Investing £150 a Month | 5% Savings Account | 11% FTSE 250 Index Fund | 12% Stock Picking |
| 5 Years | £10,201 | £11,927 | £12,251 |
| 10 Years | £23,292 | £32,550 | £34,506 |
| 20 Years | £61,655 | £129,846 | £148,388 |
| 30 Years | £124,839 | £420,678 | £524,245 |
| 40 Years | £228,903 | £1,290,019 | £1,764,716 |
What to expect in risk
Despite offering the lowest return, savings accounts have one major advantage over the stock market – they’re almost entirely risk-free. Their value doesn’t fluctuate with economic or financial headwinds, and even if a bank goes under, the first £85,000 is insured by the FSCS per bank.
The stock market is a very different beast. Even if an investor owns the best companies in the world, volatility can still be a brutal monster in the short term. And those who don’t have the confidence to ignore sharp movements in their portfolio may find themselves making critical mistakes.
Tactics like diversification and pound-cost averaging can help manage a portfolio’s overall risk. But there’s sadly no way to avoid it entirely. Nevertheless, while not every investment will be a success, by taking a patient and prudent approach to investing, UK shares become one of the best wealth-building devices around, I feel.
