The easiest way to invest in the elite blue chip companies of the UK stock market is to buy a FTSE 100(INDEXFTSE: UKX) tracker fund. Such a fund simply tracks the performance of the UK's biggest 100 companies -- the likes of Lloyds, BP, GlaxoSmithKline and Vodafone -- earning you the 'market return' (minus charges).
Investing in a tracker requires virtually no knowledge, skill or time. It's dead easy. Anyone can do it. But can such a simple way of investing make you a millionaire? And how long do you need to invest for?
The most powerful force in the universe
One of the oldest trackers around is the HSBC FTSE 100 Index Fund (Accumulation). Accumulation simply means that dividends received from the companies are reinvested to buy more shares. This 'compounding' as it's called has been described by Einstein as "the most powerful force in the universe".
The HSBC tracker was launched in 1994 and had its 22nd anniversary last Friday (30 September). I've calculated some returns for various holding periods, shown in the table below.
|Holding period (years)||No. of periods||No. of positive periods||No. of negative periods||Best return (%)||Worst return (%)||Average return (%)|
As you can see, investing over the shorter timescales was risky. In five out of the 18 five-year periods you'd have lost money. And returns were volatile. If you were lucky you'd have made a 124.3% profit; if you were unlucky you'd have lost 26.5% of your investment.
Over short timescales, investing in the stock market is a pure gamble. In the case of the HSBC tracker, there was the risk of a loss all the way up to and including the nine-year holding periods. However, the longer you're in the market, the less of a gamble it becomes. The tracker produced positive returns for holding periods of 10 years plus.
Furthermore, you can see from the average return how 'compounding' really took off as the investment timescale lengthened.
Aiming for a million
How much would you have needed to invest in the HSBC tracker fund when it launched 22 years ago to be a millionaire today? The answer's just over a quarter of a million quid -- a substantial sum.
However, double the holding period to 44 years at the same compound annual growth rate (CAGR) of 6.46% and the initial investment required to reach the magic million would come down to £64,000. For a 66-year holding period -- we might imagine grandparents investing in a tracker for their newborn grandchild -- just £16,100 would be enough to do the trick.
Of course, most people don't have such an investment made on their behalf at birth. Nor do they have a spare quarter of a million quid or even £64,000 to invest in early adulthood.
However, a million-pound pot should be achievable for many of us. By regularly investing what we can from as early as we can to benefit from long-term compounding, and upping our investment significantly in later life as children leave home, our earnings reach their peak and as we become mortgage-free, we should be able to look forward to a well-funded retirement.
What's more, tracker fund charges have come down massively in recent years. As such, it's entirely possible that the 6.46% CAGR achieved over the last 22 years will be higher going forward. Which means that with disciplined investing a well-funded retirement could come all the sooner.
The road to riches
To help Britain invest better, and enable you to take charge of your own long-term financial future, the Motley Fool's experts have published a FREE guide called 10 Steps To Making A Million In The Market.
G A Chester has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.