For many people, the New Year brings new resolutions such as losing weight, cutting down on alcohol or saving more money. While all three are noble aims, investing a greater proportion of your wealth in shares could have an even bigger impact on your lifestyle and enable you to retire earlier, pay off the mortgage faster and become financially free.
That’s because investing in the UK stock market has historically been a highly successful means to grow your wealth. Since the FTSE 100 was created 32 years ago, it has posted a total return of around 9.3% per annum and looking ahead, a similar rate of growth is very achievable in future years.
That’s at least partly because the FTSE 100 has a yield of around 4% at the present time, which means that its dependence on capital gains to offer near-double-digit returns is significantly reduced. And with a wide range of stocks trading on low valuations, the FTSE 100’s price-to-earnings (P/E) ratio of 13 indicates that there’s considerable upward rerating potential on offer since its long-term average is upwards of 15.
In addition, the global economy is now performing significantly better than even a few years ago. Certainly, challenges in China continue to hurt investor sentiment. But with the US economy strong enough to withstand interest rate rises, the UK economy performing well and quantitative easing likely to have a positive impact on the Eurozone, the profitability of the FTSE 100’s constituents is likely to improve in 2016 and beyond.
Cash, bonds or shares?
Clearly, shares are one of many assets in which investors may be considering a purchase. Cash, of course, remains popular with a great number of people, but the reality is that cash offers a relatively poor return. In fact, even locking it away for a year provides little more than 2% per annum. And while inflation is near-zero at the present time, the growth in the price level is unlikely to remain so low in the long run.
Similarly, buying bonds appears to be the wrong move at the present time, since their prices are negatively correlated to interest rates. With UK interest rates likely to move higher this year, bonds could provide capital losses alongside relatively low yields. And with property investment becoming increasingly less tax efficient, having an ISA and buying shares means no capital gains taxes, dividends that don’t contribute to taxable income and, of course, ultra-low charges with a number of online providers.
Furthermore, investing small amounts in shares is now very easy. A number of providers offer aggregated orders that can be appealing to smaller investors, while the high level of liquidity of larger companies makes them relatively easy to sell versus other assets should the need arise. And while shares are riskier than a number of other assets, diversification is easier than ever due to low dealing costs and a wide range of international companies that are listed in the UK.
So, while shares are not particularly popular at the present time owing to them having performed badly in recent years, in the long run they remain a highly appealing home for unspent cash. Therefore investing even a small proportion of your income could be a great way to start 2016, with it having the potential to equate to improved prosperity in future years.
