Why you really shouldn’t be afraid to invest in shares

Do you save a bit of money each month? Got some long-term savings building up? If you have, you probably won’t be too excited by the paltry interest rates you’re likely to be getting these days. But what’s the alternative?

When I suggest investing in shares, I’m often met with horror — people see it as gambling, or at least as very risky, and often think it’s a fiendishly difficult undertaking. But it’s really none of those things if you go about it the right way.

What are shares really?

A company that’s providing goods or services, creating employment, and making profits for its owners, isn’t remotely like the toss of a coin or the spin of a wheel. Gambling odds are always stacked against the punter, but investing odds are firmly in your favour — companies create new wealth, and when they do it well, everybody wins.

And if you buy shares with that in mind, with a view to holding them for the long term, you’re taking part in some of the best wealth-generating endeavours on the planet.

The short-term ups and downs of the market might scare you, but if you invest for the long term, they’ll even out and all you’ll see is a long and steady climb. That’s supported by a study published by Barclays, which compares investment returns over rolling 10-year periods (that’s 2005-15, 2006-16, and so on). The result is that shares have beaten cash 91% of the time.

Over 18-year periods, that rises to 99%, and when it’s extended to 23-year periods, cash has never beaten shares over the 120 years or so of the study. Not once.

How hard is it?

Is investing in shares complicated? Technically, it can be pretty much as simple as setting up a bank savings account. Most online brokers will allow you to invest regular sums, often from as little as £20 a month. And if you choose an ISA to protect your investments, you’ll save on tax too.

How tricky is it to choose what shares to buy? A common approach is to put your money into what’s known an index-tracker fund. That’s an automatic thing that follows, say, the FTSE 100, and levies very low charges — so you just choose how much per month, and sit back and forget it.

Choosing your own shares is a step up in complexity, but not necessarily a big one. Want a simple strategy? Sticking to the FTSE 100 and picking a few shares from different sectors that pay decent dividends is a very popular one. That way, there’s a good chance you’ll be able to secure around 5% in dividends every year, which beats the pants off bank interest rates before you even look at how your share prices go.

Avoid the mistakes

The biggest mistakes beginners make include searching for the ‘next big thing’ that’s going to make a million overnight, and they often buy and sell shares far too frequently and rack up broker charges. Few investors following that approach ever make it big, and you really don’t need big winners anyway. Buying shares in a diversified variety of top-quality companies, reinvesting your dividends each year in new shares, and leaving it for a couple of decades or more… that’s the way to do it.

Can you make a million?

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.