How to make £200,000 in 10 years

We asked four expert contributors to the Investors Chronicle’s Portfolio Clinic how they would go about building this type of sum. They all advised that you start by thinking about what type of returns are realistic over a 10-year period.

David Liddell, the founder of online investment advisory service IpsoFacto Investor, says: "Given low yields available elsewhere and absolute-return strategies that often seem to fail, equities need to be the main component. The question becomes, therefore, what might be a reasonable return from equities over 10 years."

Mr Liddell analysed the seven 10-year periods ending each December between 2008 and 2014 for the FTSE All-Share and found an average total return of 71.3 per cent. But this hides a wide dispersion, ranging from just 15.7 per cent in the 10-year period to December 2008 to 137.7 per cent in the 10 years ended December 2012.

"Although 10 years should be long enough for equity investing," he says, "we believe opening valuation is important; also that income can be a large part of return."

Assuming modest gearing through investment trusts and successful active investment, and adding international exposure, Mr Liddell thinks investors could expect a total return for the next 10 years, including income, of 6.2 per cent a year.

Ben Yearsley, head of investment research at Charles Stanley Direct, estimates a similar return. He says: "GDP growth is about 3 per cent - dividend yields are 3-4 per cent and once you have taken off fund charges that are typically 0.75 per cent with platform fees on top of 0.25 per cent you get to a 6 per cent (ish) return for equities.

"Of course, with higher-risk investments or better stock selection these numbers could be higher and if your returns are better than the average you may be able to either achieve your target earlier or build a much bigger pot."

Alan Miller, chief investment officer at SCM Direct points to the long-term returns from holding shares or bonds after inflation, as shown in the table below.

Source: Credit Suisse Global Investment Returns Sourcebook 2014

"If one expects future inflation to be say 2 per cent a year, this would suggest a gross return before costs of 7.2 per cent a year for equities and 3.8 per cent a year for bonds," says Mr Miller. "A well-spread portfolio with bonds and shares, aided by successful asset allocation changes, can exceed these returns."

Peter Day, partner and private client broker at Killik & Co, highlights the Barclays Equity Gilt study, which shows real returns achieved from equities, gilts and cash from end-1899 to end-2013. Index-linked gilt returns are only available from 1982, while corporate bonds begin in 1999. The nominal returns have been adjusted by inflation in order to show real returns achieved on each asset class (ie the return achieved over and above inflation on average each year).

Real investment returns by asset class (% a year)

Note: *Entire sample. Source: Barclays Research.

"While equities will undoubtedly experience a great deal more volatility than fixed-income assets, I find it reassuring to note that over longer periods equities have consistently delivered real returns of roughly 5 per cent a year," says Mr Day. "Using some basic assumptions of asset class returns, we would expect a balanced mandate to return roughly 8.04 per cent a year."

What would be the minimum starting figure needed?

If you are looking to build a pot starting from scratch, Mr Yearsley says £1,200 invested monthly with a growth rate of 6 per cent (after charges) gives a pot of £195,000 after 10 years (you have invested a total of £144,000).

However, investors who already have substantial portfolios can set aside a portion to reach this goal. The question is how much capital you need to start with. Mr Yearsley says: "Looking at this simplistically, 7 per cent growth per year doubles your investment every 10 years. Therefore, to generate a £200,000 at standard and reasonable growth rates you need to start with a pot of £100,000."

Based on his higher annual return estimate of 8.04 per cent, Mr Day says you would require an initial investment of c.£93,000 in order to have a portfolio with a value of £200,000 after a 10-year time period.

Mr Miller says: "I have assumed a 5 per cent compound return from a portfolio with 70 per cent in equities and 30 per cent in bonds. Working backwards, if you assume a 5 per cent return after costs and have to make a £200,000 profit, this implies starting off with a sum of about £320,000. Of course, in the real world, nothing is this precise and markets tend to overshoot in both directions over the short to medium term."

Mr Liddell says: "With an equity portfolio reinvesting dividends and our assumed rate of return of 6.2 per cent the starting capital would need to be around £240,000 to generate profit of £200,000. The more cautious investor, who wants to use bonds, would need a higher starting investment."

Four ways to invest your money

1. Starter funds portfolio

Mr Yearsley says: "Firstly, the basics: invest in a stocks and shares individual savings account to keep it tax-free. This year's Isa limit is £15,000. Secondly, have a spread. The old cliché is true, don't put all your eggs in one basket. Thirdly, once you have made your initial investment decisions, stick to them for the long term as most investors these days are far too short term."

Mr Yearsley recommends that a starter investor setting aside £1,200 a month to invest should have a spread of eight different funds, investing £150 per fund per month.

"I have suggested only funds, rather than mixing in with investment trusts, to keep the portfolio as simple as possible. As a long-term investor, more risk can be taken - that is one of the main reasons why I have included three small-cap funds.

"Smaller company investing can be cyclical in nature as they go in and out of fashion, however over the longer term they should (if managed correctly) provide higher levels of growth as the underlying companies should be more dynamic.

"I have kept the spread geographical and not included any sector funds. If you include sector funds (ie commodities) you have to keep a much closer eye on your portfolio as they go in and out of fashion. Apart from having a good geographical spread, I have chosen the funds on the basis of the quality of the fund manager - I am a great believer in active fund management over the long term."

Source: Ben Yearsley, Charles Stanley Direct

2. Buy-and-hold exchange traded funds portfolio

Mr Miller says: "I believe in following the three key principles of Nobel Prize-winning economist William Sharpe: Diversification, diversification and diversification. In order to cope with the highs and lows over the next 10 years I would recommend a very well-diversified portfolio, not just by asset category (such as bonds or equities) but individual markets and bonds and shares within it. For those wanting a simpler, more buy-and-hold, strategy I would suggest the portfolio below."

Source: Alan Miller, SCM Direct

3. Balanced strategy

Mr Day says: "A balanced strategy would be most appropriate as it aims to achieve strong total returns while maintaining a balanced asset allocation.

"The portfolio will consist of a number of equity growth and equity income funds chosen to provide both geographical and sector diversification. We like Fundsmith Equity (GB00B4LPDJ14), which aims to achieve long-term growth in value through investment in global equities. We favour the manager's buy-and-hold approach to investing and his consistent outperformance has been impressive. An example of an alternative asset that we would include in the portfolio for its defensive qualities and attractive yield is the Tritax Big Box REIT (BBOX). This UK commercial property Reit, which launched on the London Stock Exchange in December 2013, targeting a 6 per cent yield from a portfolio focused on large 'big box' logistics centres let to high-quality institutional-grade tenants on long-term leases."

4. Investment trust portfolio

Mr Liddell recommends an investment trust based portfolio, to include: Aberdeen Asian Income (AAIF), Edinburgh Investment Trust (EDIN), BlackRock World Mining (BRWM), JPMorgan European Income (JETI) and Securities Trust of Scotland (STS).