While there’s no denying that saving for retirement is prudent, investing in FTSE 100 companies is the smarter move, in my opinion. The stock market introduces a host of risks that investors need to consider and prepare for.
However, when managed correctly, a portfolio can deliver drastically better wealth-building results that pave the way for a superior quality of life.
In 2024, savings accounts are once again offering attractive rates. Yet, these instruments still fall short of what investing in equities can provide.
Understanding the role of saving
Putting money aside for a rainy day is always a sensible move. In fact, a golden rule of investing is to build an emergency fund before putting any money into the financial markets. That way should stock prices suddenly take a nose dive, investors won’t be forced to sell at terrible prices to cover living expenses.
However, while putting money in the bank is safe, it doesn’t actually do much in terms of building wealth. Even with a 5% interest rate on deposits, the wealth gain after inflation is still pretty mediocre. That’s why these financial instruments are better suited as a store of wealth rather than a mechanism to build a long-lasting fortune, in my opinion. The latter is where investing enters the picture.
Buying stocks for the long run
Investing is often confused with trading. The latter is usually what’s depicted in films and TV shows, with financiers rapidly buying and selling shares in moments. Buying and holding shares, for the long run, is far less exciting.
The concept is fairly straightforward. Each share represents a tiny piece of a company. After buying even a single share, an investor becomes an owner in that business, gaining a claim on any profits generated.
As such, the value of a stock is ultimately driven by the success of the underlying company. And while stock prices can be exceptionally volatile in the short term, in the long term, they eventually follow the intrinsic value of the firm.
This is why, just like when preparing for retirement, investors need to think long-term. Companies don’t magically double their profits overnight. The process can take years of careful strategising by the management teams, and it doesn’t always pan out. An investor’s job is to find the businesses most likely to succeed and, in turn, generate higher portfolio returns.
Why the FTSE 100?
The London Stock Exchange is home to thousands of enterprises. But, personally, the FTSE 100 may be the perfect place to start looking for opportunities. These firms have the advantage of size, which can be a powerful defence against volatility.
Obviously, bigger doesn’t always equal better. There are plenty of examples of FTSE 100 businesses failing to keep up with the times and, ultimately, fading into obscurity. And even today, some of the UK’s biggest firms are struggling to adapt to the new economic landscape.
But at the same time, there are also terrific industry titans trading at a valuation that’s far below their underlying value. Successfully identifying and capitalising on these opportunities could position investors to unlock market-beating or even double-digit returns in 2024 and beyond.
