Investing in shares has been a popular means of generating a retirement nest egg for many years. However, 2020 brought the stock market crash and economic uncertainty. So investors may naturally be more cautious about buying stocks because of the potential to lose money.
That is always a risk when buying shares, But over the long run, indexes such as the FTSE 100 have always recovered from their declines to post new record highs. In doing so, they have provided the means to build a generous passive income.
As such, now could be the right time to start investing on a regular basis to capitalise on the stock market’s long-term growth potential.
Investing in shares today
Today could be an opportune moment to start investing in shares. Despite the recent stock market rally, many FTSE 350 shares still trade at attractive valuations. Although they may face challenging near-term operating conditions, their low prices suggest they offer long-term capital appreciation potential. As the economic outlook improves, they could deliver higher returns than the stock market average.
Even if they only match the past returns of the stock market, the long-term result could be a sizeable retirement nest egg. After all, indexes such as the FTSE 100 have produced annualised total returns of around 8% since inception. Assuming the same return on a £200 monthly investment over a 35-year timeframe would produce a nest egg valued at £460,000. From this, a passive income of over £18,000 could be drawn each year by withdrawing 4% of the portfolio.
Managing risk in an uncertain environment
As mentioned, some people may be put off investing in shares because of the uncertain operating environments faced by many businesses. This may remain a risk in the short run, of course. But the potential for losses can be reduced by investing money in companies that have sound finances and solid market positions. For example, businesses with low debt levels and dominant market positions. These may be more likely to come through short-term difficulties to produce capital growth in the long run.
Furthermore, investing in a diverse range of shares can help to reduce the impact of poor performers on a wider portfolio. Diversifying also provides access to a wider range of growth opportunities in varied industries that can lead to higher capital returns. This may result in a larger portfolio that can provide a more robust passive income in older age.
Relative appeal of stocks
Despite ongoing economic uncertainty, now could be the right time to start investing in shares. Over time, they could produce a significantly larger nest egg than holding other assets, such as cash and bonds. Certainly, short-term risks remain high at the present time. However, this may provide further opportunities to buy cheap stocks and benefit from their long-term recoveries.
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.