3 Reasons To Buy Shares

A social acquaintance -- let's call him 'John' -- has never bought a share, invested in a fund, or bought an index tracker. The raciest investment decision that he's made, he tells me, was recently moving a savings account from The Co-operative to Santander. Or was it the other way round? I forget.

John, it's probably fair to say, needn't worry too much about his standard of living in retirement. A generous public sector employer's pension beckons, it seems.

But sadly, John is far from alone in eschewing shares, investment funds, index trackers and ETFs. Even among people who have good cause to worry about their standard of living in retirement.

So here are three reasons why investing in the stock market should form part of your plans for your long-term savings.

1) Asset class out-performance

Year in, year out, research such as the prestigious Barclays Equity/ Gilt study -- which has been published continuously since 1956 -- continues to reaffirm the long-term out-performance of shares over other popular asset classes.

Tracking asset returns since 1899, it shows that shares outperform cash, corporate bonds and government gilts ‑‑ many, many times over.

Over the entire period since 1899, the out-performance is even more striking. £100 invested in equities would be worth £1,486,860 ‑‑ while £100 gilts would be worth £23,688, just ahead of the £20,026 return from cash.

2) Individual out-performance

Those are the returns from tracking the market, of course. In other words, if you'd been able to buy an index tracker in 1899 or 1945, those are the sorts of returns you'd be looking at, less some costs.

But many individual shares have done vastly better than that, and over shorter periods of time.

Small caps, mining stocks, oil stocks, and pharma stocks, for instance. Each has their fan club of investors who reckon that their knowledge of the industry or market in question enables them to pick winners likely to outperform the market as a whole.

And out in the world of investment funds, sectors such as emerging market funds, equity income funds and 'special situation'/ recovery funds have all delivered stellar market-beating returns.

Take Fidelity's Special Situations fund. Managed by Anthony Bolton from 1979 to 2007, it delivered a 20% annual return over a 25 year period, compared to 7.7% for the FTSE All‑Share Index.

In other words, three times the sort of return measured by the Barclays Equity/ Gilt research. Fund manager Neil Woodford is another long-term out-performer.

3) Profit-linked returns

Shares -- either held directly, or indirectly through funds -- are a stake in real businesses, of course. And many of those businesses return part of their profits to investors in the shape of dividends. The more profits, the higher the dividend pay out.

Now, dividends aren't a certainty. But what is a certainty is that dividend payouts are linked to profits, not policy. The interest on bank deposits, on the other hand, is largely set by the Bank of England, acting on behalf of the government, at a level determined by economic policy.

And it won't have escaped your notice that even as corporate profits have started growing again, bank rate remains stuck at a 300-year low of 0.5%. Where I -- and a number of other observers -- expect it to stay until mid-2011.

Until then, the interest on bank deposits will also remain at rock-bottom levels -- in many cases, below the rate of inflation, implying a negative real return.

Rare exceptions apart -- Lloyds Banking Group (LSE: LLOY), Royal Bank of Scotland (LSE: RBS) and BP (LSE: BP) -- dividends are set by businesses, on the basis of their profits, and not by officialdom on the basis of economic policy. And I know which I prefer.

The bottom line