Stocks & shares should be the main vehicle for your long term financial goals.
What are your financial GOALS?
Do you have long term financial goals? These will be goals of 5 years and beyond like saving for your children’s college fees or for retirement.
A millennial may think retirement planning is not important. Time does pass very quickly. Before you realise it, the 30s, 40s and 50s come along.
As retirement approaches, the reality that enough savings have not been made to maintain a reasonable standard of living can be devastating.
With lengthening life expectancy and with the states increasing asking individuals to take responsibility for their pensions and social care, retirement planning should be accorded the highest priority very early.
You do not want to run out of money in retirement.
The question then arises —>
—>where are you saving for your long term financial goals?
The evidence that over the long run, returns from the stock market beat those from cash and bonds is well established.
Why then do a large majority of people use cash savings for their long term financial goals?
A fundamental reason derives from a failure of our education system…..
…………The benefits of starting early to save and invest and thereby deploy the power of compound interest are therefore denied to a large segment of the population who miss out on not only building personal and family wealth but also in participating in the economic growth and prosperity of their country.
Secondly the so called professionals are very poor in teaching the populace the benefits of stock market investment in an easy and down to earth format. Most are short-termist in their practice and any delivery is couched in complex jargon and not helpful for the new investor who wants a simple runway to create long term wealth through stocks and shares.
What is holding you from investing?
—->What are your Fears?
I listen regularly to friends and colleagues at the workplace. It is amazing to see that even when parents are saving for their children, where the investment horizon is about 10 – 20 years, most prefer to do so in a cash savings account.
This is a situation where the risks inherent in the stock market can be mitigated by the time in the market.
WHY do we not invest in the stock market?
There are two common MYTHS?
- The first is the widespread belief that investing in the stock market is a gamble and a very risky venture.
- The second is that you have to be fabulously wealthy to invest in stocks and shares.
Let me address the first……
…………Yes stocks and shares are risky and you may not get back the amount you invested. However this risk is heightened if you do not understand the principles of investment. If you invest randomly and short term, buying shares on a tip or because the stock market is rising, without any research or knowledge of company fundamentals and valuation, you may strike it lucky but the odds of losing significant capital are very high.
You are likely to buy during periods of great optimism when prices are riding high. You then sell out when the inevitable correction occurs,incurring capital losses. YES this is gambling or speculating, and not investing.
The smart long term investor will choose shares after diligent study, invests regularly in a diversified portfolio and is not panicked by market setbacks which in fact present opportunities to buy more of quality companies.
There is an argument that cash is a more risky long term asset than stocks and shares —–
——> With the current low interest rate environment, cash is yielding negative returns after inflation.
Some good evidence!……….
The Barclays Equity Gilts Study
The Barclays Equity Gilts Study, published annually, shows that the long term annual average real return of US equities from 1925 is about 6.7%. Bonds returned 2.6% and cash 0.5%.
Over the past 100 years, UK shares have delivered an annual return after inflation of 5%. Bonds delivered 1.3% and cash 0.8%.
—->Over 10-year periods, equities outperformed cash 9 out of 10 times (91%). Over rolling 18-year periods by 99%.
—->Over 23-year periods, equities have not lost money.
Past performance is no indication of future returns. Different returns may be applicable to other markets.
A report by Nerdwallet, shows that avoiding the stockmarket can cost a 25 year old $3.3million in retirement savings by the age 65.
…………..Consider a 25 year old earning a median annual salary of $40,456 and saving 15% over 40 years. If they invested 100% in the stock market, they will accumulate $4.57million after annual fees of 0.7% and before inflation. In a savings account, the equivalent will be $1.27 million before inflation. In cash they will only accumulate $563,436.
Fidelity International Report
A Fidelity International report showed that £10,000 invested in the average UK savings account at the start of the financial crisis in 2008 would now be worth £10, 461.The same amount in the FTSE all share index would now worth £16,846.
—->Granted that past performance is no guarantee of future returns, several studies continue to show the out-performance of shares over cash for the patient long term investor.
Over 40 years, it is virtually impossible to lose money on shares.
…….Yet this message is lost on most savers who are content to leave their long term savings in cash, a more risky undertaking!!
The second myth you need to overcome is that you have to be fabulously wealthy to invest in stocks and shares.
This misconception is so embedded in our society. The truth is that most brokerages have no minimum amount to open an account. You can start investing as low as $20 a month in an investment savings plan.
In the UK you can save from as little as £25 monthly into a savings plan. Many monthly plans aggregate contributions and have set days in the month to invest all investments at discounted cheap rates.
This is a simple way to start your investment journey if you have limited earnings. Set up an automatic or direct debit monthly transfer from you current or check account to your investment account.
If you cannot devote the time to learn how to pick individual shares, you can invest in low cost Index fund, Exchange Traded Fund (ETF) or Investment Trust.
Use a tax efficient vehicle like a 401(k) plan and Roth IRA in USA and ISA or SIPP in the UK. In Canada you can invest in a Tax Free Savings Account (TFSA) in addition to a Registered Retirement Savings Plan(RRSP). Japan has the NiSA account.
Check what tax efficient plans are available in your country and use them to invest in your brokerage account.
Stocks and shares should form a core portion of the investment portfolio of the long term investor. They are more risky then cash and bonds in the short term but a diversified portfolio of quality companies or funds should outperform in the long run.
The principles of long term investment are simple but not easy to learn. Therefore LEARN, STUDY and EDUCATE yourself so you can harness the amazing power of compound interest, described by Albert Einstein as the 8th Wonder of the World.
Do not tarry…………START TODAY!!!!!
For more reading get my book, ‘The Smart & Common Sense Investor’.