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Why you should invest in shares
The stock market is often considered to be a very risky place. And it’s true that some people do lose large amounts of money there.
But if you’re prepared to invest sensibly and for the long-term, there’s a strong chance that you’ll do fine. Shares are normally a much better bet than leaving your money in a savings account.
If you had invested £1,000 in the UK stock market at the beginning of 2012, that sum would have grown to £1,112 by the end of the year. Not bad, eh?
And if you had invested £1,000 at the beginning of 2003, that would have risen to around £2,250 ten years later.
Let’s now look at how UK shares have compared with other types of asset. In particular: gilts (government bonds), corporate bonds, and cash (a typical savings account.)
Real investment returns by asset class (% per annum)
2012 | 10 years | 20 years | 50 years | |
UK Equities/Shares | 8.7% | 5.0% | 4.5% | 5.5% |
Gilts | 1.6% | 3.4% | 5.3% | 2.7% |
Corporate Bonds | 12.1% | 2.3% | - | - |
Cash (typical savings account) | -2.7% | -0.2% | 1.6% | 1.6% |
Source: Barclays Equity Gilt Study 2013. Figures to 31.12.12 Income reinvested
So if you had invested in the UK stock market 10 years ago, your money would have grown by 5% a year plus inflation. Over 50 years, your money would have grown by 5.5% a year plus inflation.
Both those figures are way ahead of cash. Over ten years, cash would have delivered a negative return of – 0.2% a year once you adjusted for inflation.
Now the last decade included a massive stock market crash in 2008, but if you had stayed calm and stayed invested, you’d still have done fine.
Just remember that you would only have achieved these returns if you had reinvested any dividends you received back into the stock market.
If you’re not convinced about the history yet, look at these figures. They analyse how well stock market investments did over different holding periods since 1899.
Stock market performance over different holding periods
Two year holding period | Five year holding period | 10 year holding period | 18 year holding period | |
Outperform cash | 75 | 81 | 94 | 95 |
Underperform cash | 37 | 28 | 10 | 1 |
Total number of years | 112 | 109 | 104 | 96 |
Probability of outperformance by Shares | 67% | 74% | 90% | 99% |
So since 1899, there have been 112 possible two-year periods where you could have held an investment in the stock market – e.g 1899/1900, 1934/1935.
And for 75 of those two-year periods, you would have beaten cash; for 37, cash would have beaten shares.
Over longer periods, the chance of cash beating shares falls dramatically. So there has only been one 18-year period where cash outperformed shares.
In other words, if you invest in the stock market for just two years, you’re taking a lot of risk. But if you invest for 10 years or longer, the risk is much lower.
What about the future?
Of course, there are no guarantees that history will repeat itself. There’s always a chance that we’re entering a long period where shares will do badly.
But I think that’s unlikely. The global economy is gradually recovering from the financial crisis and emerging markets such as China and India look stronger and stronger. There are plenty of opportunities for well-managed companies to grow and prosper.
Good year
Stock market sceptics could also point to the fact that the stock market is currently at its highest levels since 2007. Shares have had a good run over the last year or so, so you could argue that performance will inevitably be weaker over the next two or three years.
My reply to that is: yes, performance might not be so strong in the near future or it may be great. We just don't know. It’s very hard to make short-term predictions. But history suggests that you’ll do fine over the long-term.
And anyway, if you gradually drip your money into the stock market over a period of years, you’ll be able to take advantage of lower share prices should we see any temporary falls in the future.
How to do it
If you’re now tempted to invest, we need to look at how to do it.
The simplest way is to invest in an index tracker fund. These funds buy shares in all the different companies in a particular index. So a FTSE 100 index tracker would buy all hundred companies in the FTSE 100 index – and if the FTSE 100 rose by 10%, you’d normally expect a FTSE 100 tracker to rise by roughly the same amount.
One well known index tracker is the Fidelity MoneyBuilder UK Index fund, which tracks the FTSE All-Share index.
These figures from Fidelity show how this tracker fund has comprehensively thrashed cash in recent years:
Fund performance compared to cash
Period | Fidelity MoneyBuilder UK Index outperformance |
Four years | 15.63% |
Five years | 5.39% |
10 years | 9.38% |
Source: Fidelity. Figures for periods ending 31.12.12
Over a four-year period, the Fidelity tracker has beaten cash by 15.63% a year!
To be clear, I'm not suggesting that you should put every last penny you have into the stock market. It's prudent to always have a cash cushion that you can use in emergencies. And you may want to invest in lower risk assets such as bonds as well.
But the historical record is clear. I think there's a strong case for putting at least some of your savings into the stock market for the long-term.
So are you convinced? Do you think the stock market is a good way to build long-term wealth? Let us know in the comments box below.
