I understand that life throws situations at us, which can drain us of cash. At 50, you may not have any savings, though you may own your house, a car, along with other assets. However, you are correct when clicking on this article to read that savings are very important, especially if you’ll be reaching retirement age within the next two decades.
The key element when building an investment portfolio, which in turn can help to build your savings, is to really believe in the sector you want to invest in. Not just for the next week or month, but for the next decade. I know you are thinking that a decade sounds like a long time. True – it is. Except, for a FTSE 100 company, it is not.
The CEOs and board members of these large firms look and plan for years in advance in order to grow and offer value to shareholders, mainly through capital growth and dividend payments.
So, thinking now, what industry could be due a prolonged period in the limelight, which genuinely could generate you substantial returns and make you rich? My pick is the finance sector.
Ever since the crash of 2008, the banking sector has loved to talk about risk reduction and how it makes everything better and safer. Indeed, regulations imposed on the sector (look up Basel III Framework) have meant that banks have had to become much safer operational behemoths.
Take the capital adequacy ratio. It sounds dry and it largely is, but fundamentally it is very important. It measures how much capital the bank has versus its risk-weighted exposure (e.g., amounts lent out to mortgage owners or credit cards, etc.).
The fact that all banks within the FTSE 100 have massively improved these ratios over the past decade means the sector is in a very strong position for the next decade. The sector has boosted its balance sheet in various forms, making me confident that any downside risk is limited.
Make Britain great again
Over the past decade, British banks haven’t seen much love, for the most part. I am talking about Lloyds Banking Group, RBS, Barclays, etc.
For example, Lloyds share price over the past five years actually gives a negative return of over 10%! However, I think this is going to change, and that buying now for the next decade offers a large upside potential for investors.
Brexit indeed could make Britain (and the banks) great again. We have started to see this over the past two weeks, with optimism over a fresh deal seeing banks outperform other sectors. The RBS share price jumped 11% in one day, two weeks ago.
Domestic banks in particular could do very well, as a pick up in consumer demand here in the UK is likely to follow after Brexit gets sorted out. With the cloud of uncertainty passed, banking could be in for a stellar few years.
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Jonathan Smith has shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019