Why buy shares? Most people, it’s fair to say, give the question little thought: shareholders are a distinct minority among UK adults.
And those who do consider the question generally don’t go very far beyond the potential capital gains that they might earn. Among the public at large, for instance, dividends are largely ill-understood, and under-appreciated.
But in fact, the arguments for share ownership go beyond simplistic considerations of gains and dividend income. There are, it turns out, are several compelling reasons to own shares. Which is why, of course, we at The Motley Fool are such enthusiastic advocates for share ownership, and particularly long-term buy-and-hold share ownership.
So, in no particular order, here are five reasons to include share ownership among your wealth-building and asset allocation decisions.
1. A ‘store of value’
If you’ve got wealth, then it’s in the form of assets. And for many people, apart from the house in which they live, that wealth is stored in the form of cash.
But the real (that is, inflation-adjusted) rate of return on bank and building deposits is close to zero right now. And over the past ten years, in fact, according to the prestigious annual Barclays Equity/Gilt Study, the annual return on cash has been minus 1.9%.
That’s right: a negative rate of return—making the point that cash performs remarkably poorly as what economists call a ‘store of value’. And shares? Well, over the same ten-year period, you’d have gained 3.2% a year.
2. Out-performance over the long term
The past ten years have been exceptional, of course. The great financial crash of 2007, the recession of 2008-09, the Bank of England’s quantitative easing. The list goes on.
But actually, shares have performed remarkably well over the long term. UK government debt, known as gilts, has slightly out-performed shares over the past ten years, just as it has over the past 20 years. But who do you know who holds gilts? To most of us, they’re as exotic as Mongolian Yak Futures.
Over 50 years, and over the full 118 years that the Barclays Equity/Gilt Study covers, shares have comfortably out-performed cash and gilts. Over 50 years, for instance, cash would have earned you 1.2% a year, gilts 3.1%, and shares 5.6%.
And while 50 years might seem like an unimaginably long investing horizon, my first share purchase was 44 years ago. The years, in short, have a habit of adding up.
3. An income stream from dividends
Let’s return to dividends, for a moment. Dividends are how shares pay an income, with companies declaring an annual dividend (paid quarterly or half-yearly) in respect of each share held.
Under present tax legislation, dividends up to £2,000 a year are tax-free. Beyond that, basic rate taxpayers pay tax at 7.5%. To be sure, the tax due rises steeply for higher-rate taxpayers, which is why they should make sensible use of their annual ISA allowance, which is presently £20,000 a year.
But taken together, and particularly taking into account the higher returns available with shares, that makes dividends a fairly attractive form of supplementary income.
4. Less risky, and more diversified, than property
What about property? After all, ‘buy-to-let’ has been a popular wealth-building tactic over the past 15 years.
The problem here is that quite apart from the government’s recent tax clampdown on the gains from buy-to-let, property has several drawbacks when compared to shares.
First, if you’ve one buy-to-let property, then all your nest eggs are, almost literally, in one basket. The same capital outlay spread over a share portfolio would be considerably more diversified.
Second, being a landlord is hard work, not without risks, and rental income is at risk of rent ‘voids’ between tenants.
And third, property is ‘lumpy’. If you need to raise cash, you can’t sell just part of a house.
In short, give me shares, any day.
5. Escape the Grim Reaper
Finally, it’s worth mentioning that shares quoted on London’s AIM market can be subject to inheritance tax relief.
While many AIM shares are minnows, there are plenty of decent-sized businesses to choose from, some of which are many decades old. Shareholdings in these, if eligible and held for at least two years, are free of inheritance tax, under present rules.
Again, not many people know this. But among savvy investors, AIM shares are a popular way of transferring wealth between generations. If you’re in your 30s or 40s, this might be unlikely to figure prominently in your investment decision-making processes. But if you’re in your 60s or beyond, then it might.