Building wealth in the stock market does not necessarily require putting large sums into it. For example, say someone wants to put aside a fiver a day to buy UK shares, over time they could hopefully build quite a nest egg.
Little by little, towards a big result
If they can achieve compound annual growth for their portfolio of 5% (made up of dividends and share price growth, minus share price falls), £5 a day ought to turn an empty ISA into one worth £100k after 27 years.
At a 10% compound annual growth rate, that would fall to 20 years.
By the way, although I mentioned it above, it does not have to be a Stocks and Shares ISA. A share-dealing account would work, or a trading app, though an ISA may offer more tax advantages, such as capital gains and dividends inside it going untaxed.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
A Self-Invested Personal Pension (SIPP) could be an option too, speeding things up further as tax relief means that each £5 put in would in fact enable at least £6.25 to be invested.
What’s a realistic goal?
In the example above, there is a big difference between a 5% compound annual gain and a 10% one. Warren Buffett’s long-term record at Berkshire Hathaway was close to double that. Berkshire’s per-share market value compounded at 19.9% annually from 1965 to 2024.
We are not all Buffetts though. Even a 10% compound annual gain from a portfolio of UK shares is a challenging goal, in my opinion.
I do see it as possible though. Take the past five years as an example. The FTSE 100 index of leading UK shares has gone up by 47%. On top of that, it currently yields 3%, though someone who invested five years ago would now be earning a yield of around 4.4%.
Past performance is not necessarily indicative of what to expect in future, granted. But I believe if an investor chooses a well-rounded selection of high-quality UK shares selling at attractive prices, then over the long run a 10% compound annual gain is an achievable goal.
Does Greggs hit the mark?
For example, one share I think investors ought to consider both for its growth and income prospects is high street bakery chain Greggs (LSE: GRG). I have bought it for my own portfolio over the past year or two – and frankly, to date it has been a disappointment.
While the 4.5% yield is welcome enough, the share price fall of 11% in the past year (and 43% over the past five years) is not the stuff of investor dreams.
But that fall has presented investors like me with an opportunity to buy in at a lower price to a profitable company with a well-proven business model.
Greggs is growing sales revenues in its existing shops. Add to that ongoing new openings and the company is growing handily. Last year, for example, revenues moved 7% higher to £2.2bn.
The share price fall reflects risks including inflation eating into profit margins. There is also the risk of a mismatch between Greggs’ product offer and hot summer weather, like we saw last year.
But stepping back and taking a long-term view, the share looks cheap and worth considering to me.
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Christopher Ruane owns shares in Greggs.
