Goldman Sachs launched its Marcus savings account recently and the adverts have been all over the television. You can start saving with just £1 and there are no fees and charges, the adverts trumpet. But the bottom line is that the account pays an Annual Equivalent Interest rate (AER) of just 1.5%, which I think is derisory.
The best-performing class of asset
Indeed, with the annual rate of inflation currently running between 2% and 3%, if you tie up money in a Marcus account you will be losing some of the spending power of your funds over time. You might as well just throw a few tenners in the bin once a year, it would provide a similar effect!
So I’d forget a Marcus account and think seriously about starting a regular investment in the stock market. Studies have shown that over the long haul the total return for investors from shares has outpaced all the other major classes of assets, such as property, bonds and savings accounts.
Of course, the return comes in two ways: in the form of regular dividend payments and from rising share prices. Savvy investors also know that they can turbocharge their returns from shares by reinvesting all the dividend payments back into shares. When you do that, you will be compounding your money because the reinvested dividends will earn dividends and so on. Compounding is the real secret to building wealth. Some call it a miracle, but really, it’s just maths.
Shares on the stock market have been weak recently, which means that it’s potentially a good time to start accumulating share investments to hold for the long haul. Some of the UK’s biggest companies are paying attractive-looking dividend yields that are often as high as 5%, 6% and 7% — returns that straight away put the Marcus account to shame. However, unlike a cash savings account, the initial capital you invest in shares can fluctuate up and down with share prices. Indeed, dividend payments can wax and wane from individual companies too, so you embrace more risk if you invest in shares compared to a cash savings account.
Why it looks like time to be greedy with shares
However, well-known and mega-successful US investor Warren Buffett once said, “we simply attempt to be fearful when others are greedy and to be greedy when others are fearful,” which really means he buys shares when they are down and out of favour, such as now, and not when they are riding high. The reason for that is that bull markets often drive valuations too high and investors then end up paying too much for their shares. The opposite can also be true: when shares go down, valuations are often driven down and there’s more chance of bagging a bargain.
However, there’s no need to try to pick shares in the market when you can buy a slice of the market itself. If you invest regularly in a FTSE 100 tracker fund, for example, your funds will automatically be diversified across 100 of Britain’s largest public companies, which will iron out the risk from holding the shares of individual companies. I reckon you could see decent returns over the next few years if you put a regular investment into a FTSE 100 tracker that automatically reinvests the dividends and hold it within a stocks and shares ISA.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.