While they can be volatile in the short term, stock market indexes like the FTSE 100, FTSE 250 and the S&P 500 tend to rise over the long run. As a result, they can help investors build wealth and save for retirement.
This was highlighted in a recent presentation by UK money guru Martin Lewis on his Martin Lewis Money Show. Here, he showed how much an investor would have now if they’d stuck £1,000 in several different indexes 10 years ago.
Stocks have smashed savings accounts over the last decade
Before I show the figures, it’s worth pointing out that Lewis highlighted the risks of investing in the stock market. “Investing is volatile,” he said.
“Only invest what you won’t need for at least five years, after clearing expensive debts and building an emergency fund,” he went on to say. This is very sound advice.
As for the calculations, Lewis showed that had someone started with £1,000 a decade ago and put this money into top UK savings accounts over the 10-year period, they’d now have about £1,270. Note that to break even after inflation, they would have needed to grow the money to around £1,390, so by staying in cash savings products they would have actually lost money in ‘real’ terms (ie factoring in purchasing power).
By contrast, £1,000 invested in the FTSE 250 index 10 years ago would now be worth about £1,640. Meanwhile, £1,000 invested in the S&P 500 index would now be worth about £3,790 – almost three times the amount of the cash savings figure.
These calculations include reinvested dividends. I assume they don’t include fees though (such as fund and platform fees).
Overall, it was an eye-opening presentation from Lewis. The takeaway was clear – while volatile in the short term, stocks can generate very attractive returns over the long run.
Even higher returns are possible
Now, I’m a big fan of funds that track indexes like the different FTSEs and the S&P 500. I hold a number of these index products in my ISAs and SIPP.
But I also hold a lot of individual stocks. The reason why is that individual stocks can generate even higher returns over the long run (note that they’re higher-risk than index funds).
Take Apple (NASDAQ: AAPL), for example. I first bought this stock back in late 2018 near the $40 mark.
Today however, it’s trading near $280, meaning that on a US dollar share price basis, I have made around seven times my money in the space of around seven years. That’s a far higher return than major indexes like the FTSE 100 and the S&P 500 have delivered.
Why has this stock risen so much? Mainly because Apple’s revenues and earnings have risen significantly on the back of the success of its smartphones and App Store.
Note that it hasn’t gone up in a straight line. At times, concerns over growth and competition (long-term risks) have hurt the share price temporarily.
Now, I’m not saying that investors should rush out and buy Apple shares today. I think there are probably better opportunities in the market to consider right now.
But the performance of this stock highlights what’s possible when picking individual shares. Get it right, and the results can be fantastic.
