The trouble is, it’s not hard to find companies that feature in the top tier and yet have massively outperformed it. One example is speciality chemicals firm Croda International (LSE: CRDA).

FTSE 100 beater

Over the last year, the £12bn cap has climbed 43% in value (including today’s near-7% rise). For comparison, the FTSE 100 is up 15%. 

It’s not just that Croda has beaten its index over the last year. The long-term gains have been excellent too. Since 2016, the share price has appreciated a little over 145%. The FTSE 100? Just 4%. Even though the latter boasts a larger dividend yield that can be reinvested, there’s simply no contest when it comes to performance.

Based on Croda’s fundamentals and today’s interim results, I don’t see this trend changing soon.

Record first half

Thanks in part to a recovery in demand “across all regions and sectors“, sales jumped by almost 39% to £934m from January to June. At 60%, growth at its Life Sciences division was a particular highlight. Importantly, the FTSE 100 stock announced that sales were now “well above 2019 levels” before the pandemic struck. 

As such, it was no surprise that the company reported record adjusted pre-tax profit of £229.5m. That’s 50.5% higher than at this point last year. It’s also 35% higher than two years ago.

Although unlikely to generate much interest from income hunters due to its relatively low yield, I also noted that Croda hiked its interim dividend by 10% today. As the firm itself highlighted, this continues “an unbroken trend of increasing returns over nearly 30 years“. This is the sort of consistency that separates the wheat from the FTSE 100 chaff, in my opinion.

Richly-valued

Looking ahead, Croda thinks recent momentum will continue over the remainder of 2021. Thanks to ongoing demand from customers and the contribution of new acquisitions, the company now expects adjusted pre-tax profit to be “significantly ahead of current expectations“. No wonder the share price is setting fresh highs today. 

This is not to say an investment in Croda now would be devoid of risk.

As always, past performance is no guide to the future. Despite today’s news, the company commented that sales of solution ingredients relating to Covid-19 “could moderate” in the months ahead.

At 38 times forecast earnings before markets opened this morning, Croda’s valuation is also undeniably rich. When markets shake, it can be the case that holders of the most expensive stocks suffer the most. And even if the FTSE 100 generally behaves itself over the rest of 2021, we could see more investors taking profits and rotating into battered value stocks as the pandemic is sent packing. 

For holders of a fund tracking the return on the index, this won’t be a problem. However, it could cause some short-term pain to those backing Croda.

Still a buy for me

Despite the above concerns, I’d still buy the stock today based on its track record and growth potential. In an index that arguably features some established, but ultimately very average, companies, CRDA looks to be a great exception.

The post I’d forget the FTSE 100 and buy this stock instead! appeared first on The Motley Fool UK.

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• £1,000 buys 35 shares in an incredibly reliable FTSE 100 dividend stock

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Croda International. 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.

Ten years on, the Vanguard LifeStrategy range continues to be hugely popular with UK retail investors. Today, I’m looking at the arguments for and against having one of these funds as my entire portfolio.

Let’s quickly recap on how they work.

Vanguard LifeStrategy: one-fund investing

Vanguard’s LifeStrategy range is made up of five funds. Each of these differ in the proportion of equities and bonds they hold. So, the LifeStrategy 100% Equity fund invests 100% in stocks. The majority of these are from developed markets, such as the US and UK. 

However, the LifeStrategy 80% Equity fund — which I personally hold — only invests 80% in stocks. The remaining 20% goes into bonds. The LifeStrategy 60% Equity and LifeStrategy 40% Equity therefore offer an increasingly cautious mix. 

If I were very risk-averse, I could opt for the LifeStrategy 20% Equity fund (20/80 equity/bond split). 

Some advantages…

There’s are many reasons why the Vanguard LifeStrategy range has accrued £29bn of investors’ capital over the last 10 years.

#1. Instant diversification. With a few mouse clicks, these passive funds allow me to spread my cash around a massive number of stocks and bonds. Trying to do this any other way would be pretty impractical and expensive.

#2. Low fees. It costs far less to manage a passive fund compared to one run by a human money manager. This allows Vanguard to set its LifeStrategy fees at just 0.22%. Keeping costs low can have a huge impact on returns over time.

#3. Fuss-free. Checking in to my portfolio sporadically is vital if I’m to reach my financial goals. However, the Vanguard LifeStrategy funds require no maintenance. Rebalancing is done automatically. This ensures the equity/bond weighting is maintained. 

#4. Great performance (so far). Since launching in 2011, the funds have beaten a good proportion of their active counterparts. The LifeStrategy 80%, for example, has climbed 150% in value. 

Some drawbacks…

#1. Can’t beat the market. By its very nature, an investment product designed to track market returns will never beat it. As such, a Vanguard LifeStrategy fund will not radically grow my wealth in double-quick time. There’s also no guarantee the performance to date will be repeated.

#2. Too diversified. As Warren Buffett said, diversification “makes little sense if you know what you’re doing.” Those with a tolerance for risk may do better by being more concentrated in only a few (brilliant) stocks. Passive investing means I’m compelled to own market dogs as well as stars.

#3. No small-cap focus. The LifeStrategy funds only hold stocks from the biggest firms in the world. Therefore, I’d need to find another way of getting exposure to smaller, faster-growing companies. Historically, these have delivered greater gains over the very long term.

#4. Inflation. Bonds tend to be negatively correlated with stocks. Holding them is therefore seen as a way of reducing risk. However, inflation is problematic for fixed assets. This could mean those funds with higher bond weightings could struggle going forward.

What I’m doing

I’m happy to keep a Vanguard LifeStrategy fund as a core holding in my portfolio. Even so, I enjoy trying to generate an even better return through my own stock-picking. Whether this actually happens is another thing entirely!

That said, a single fund portfolio like this would probably be ideal if I didn’t have the time, energy, or inclination to follow the stock market’s inevitable twists and turns.

The post Vanguard LifeStrategy: is a single fund all I need? appeared first on The Motley Fool UK.

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• How much is needed in an ISA to target a £766.60 weekly passive income?
• After a 103% gain, this penny stock’s forecast to rise a further 106%. But will it?
• Will the stock market finally crash next week?
• No pension at 40? Don’t panic! A SIPP could be the answer
• Potentially 58% undervalued, is this a penny stock bargain?

Paul Summers owns shares in Vanguard LifteStrategy 80% Equity. 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.

Minimalist investing 101

Restricting oneself to a set number of holdings could be considered the best place to start.

Naturally, the actual number will vary from person to person. That said, we all have a limit over how much time we can devote to researching, buying and tracking our investments. My ISA portfolio, for example, never has more than 20 stocks in it. Any more than this and I’d feel overwhelmed. Moreover, too many stocks might dilute the impact of my big winners! 

For some people, even 20 separate companies will feel like too much. In this case, they may want to consider buying a small number of cheap, exchange-traded funds. These simply track an index like the FTSE 100, give instant diversification and require next to no ‘maintenance’.

Ditch the app

It’s been incredibly easy to spend more time than necessary staring into a screen recently. It’s for this reason that I’ve deleted all investing-related apps from my smartphone. The logic behind doing so is that I’m then less compelled to check my portfolio. As a result, both my homescreen and my brain are less cluttered.

Now, removing these apps might feel uncomfortable at first but persistence is the key to breaking any habit. It’s no different from keeping unhealthy food out of the home. By removing the ‘cue’ (the app icon), I minimise the likelihood of a ‘behaviour’ (habitual portfolio-checking) occurring. Setting daily time limits on apps is a less severe option.

Go automatic

One thing I’ve learned in many years of investing is that I can’t time the market consistently. As such, the vast majority of my buying now happens automatically on the same day every month via my broker’s regular investment scheme. This helps to remove emotion from the process. It also saves me money. Some online share-dealing platforms charge zero commission on monthly purchases! Over time, this could have a dramatic impact on my returns. 

Another minimalist investing idea is to automate savings. This involves instructing a bank to transfer a fixed amount over to a Stock and Shares ISA every month. In addition to removing the need to do it manually, scheduling this transfer to happen the day after being paid also ensures building a nest egg for the future is prioritised over frivolous spending. As the saying goes, “Pay yourself first”. 

Don’t ‘read all about it’

A final way to adopt a minimalist approach to investing is to reduce the amount of news we consume.

Clearly, this idea is easier said than done in the midst of a global pandemic. However, I think the important word here is ‘reduce’. Attempting to eliminate all news flow from one’s life is not only difficult but could cause anxiety. Being selective is key.

For me, this involves seeking news from only one or two reputable sources and treating everything else as noise. If this sounds too restrictive to you, consider saving your regular news binge for times when the market isn’t open.

The post 4 minimalist investing tips for 2021 and beyond appeared first on The Motley Fool UK.

More reading

• How much is needed in an ISA to target a £766.60 weekly passive income?
• After a 103% gain, this penny stock’s forecast to rise a further 106%. But will it?
• Will the stock market finally crash next week?
• No pension at 40? Don’t panic! A SIPP could be the answer
• Potentially 58% undervalued, is this a penny stock bargain?

Paul Summers 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.

After all, why bother researching all the companies in, say, the FTSE 100 when an investor can simply buy a cheap fund that passively tracks the return of the index itself. Those who did just this back in March 2020 will have done rather well since.

FTSE 100: On a roll

From the depths of the market meltdown to last Friday’s close, the FTSE 100 has climbed back a stonking 35% in value. That’s a superb return for very little work as far as ETF holders are concerned.

This strong recovery isn’t hard to fathom either. The emergence and gradual rollout of several vaccines was a shot in the arm for market sentiment. A resolution to the bitter trade negotiations between the UK and the EU at the end of 2020 likely provided further positive momentum. 

Now, I think an ETF tracking the FTSE 100 remains a good investment. It’s certainly a better idea than sticking savings in a Cash ISA! Since I’m looking to really grow my money over the next decade or so however, I’ve decided to track a group of companies that could generate an even better return.

Top ETF pick

My top passive investing pick for 2021 is WisdomTree Battery Solutions UCITS ETF (LSE: CHRG). Thanks to the rapidly growing demand for electric cars and energy storage, I see getting at least some exposure to this megatrend as vital for any investor with many years left in their stock market journey.

Why this particular fund? There are a few reasons. First, there’s the size of the portfolio. With 95 holdings, this ETF isn’t too reliant on just a few companies succeeding nor too large to completely dilute the contribution of those stocks that really do perform.

Aside from this, WisdomTree’s fund also offers good geographical diversification across 19 countries. Almost 30% of its holdings are based in China and 15% from Japan. Only 22% or so are listed in the arguably-overvalued US market.

The cherry on the cake for me is the ongoing fee of 0.4%. That may look a lot compared to the typical 0.07% charged by a FTSE 100 tracker but I consider it good value for tapping into this growth story. It’s also slightly cheaper than the only other ETF currently tracking this trend that I could find — the L&G Battery Value-Chain UCITS ETF. 

Buyer beware

Of course, nothing is a sure thing when it comes to investing. After such a strong run in green energy, electric car and battery-related stocks in recent months, there remains a very real possibility that we could see some profit-taking in 2021. As such, this fund certainly has a chance of underperforming the FTSE 100 for a while.

As a long-term investor however, this doesn’t concern me. What’s more important is that I look to future proof my portfolio by buying into promising trends when they are in their infancy. The FTSE 100 might contain some great businesses but I just can’t see these growing at a similar clip to those in the battery space. 

It could be a bumpy ride, but I’m optimistic that my eventual returns will be worth it.

The post Forget tracking the FTSE 100. Here’s my top ETF pick for 2021 and beyond! appeared first on The Motley Fool UK.

More reading

• How much is needed in an ISA to target a £766.60 weekly passive income?
• After a 103% gain, this penny stock’s forecast to rise a further 106%. But will it?
• Will the stock market finally crash next week?
• No pension at 40? Don’t panic! A SIPP could be the answer
• Potentially 58% undervalued, is this a penny stock bargain?

Paul Summers owns shares in WisdomTree Battery Solutions UCITS ETF. 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.

To be fair, if you’re aiming to make a passive income, putting your money into a Cash ISA is probably better than stashing your hard-earned cash under the mattress. Indeed, a small interest payment is better than none. But, even the best fixed-rate Cash ISA only pays around 1.4% in interest. Moreover, you’ll likely have to tie your money up for a few years to get this rate.

I think there are better ways of generating a passive income that give you the flexibility to make the most of your wealth, whether that’s by spending it or by compounding it. 

Index tracker funds

Index funds aim to track an index, not beat it. However, because of this they’ll also likely exceed the returns from most other funds over the long run. 

Moreover, index tracker funds are boring. And this is good. Index funds trade far less frequently than other types of funds, meaning lower expenses and higher returns. And, as the aim of the fund is to mimic an index, there’s no gambling on the next big thing.

All this means you can buy an index tracker fund and forget about it, all the while knowing it’s allowing you an efficient means of earning a passive income. 

Dividend-paying stocks

Income investing is one of the simplest ways to create a passive income. Currently, with bond yields so low, dividend income on many FTSE-listed stocks exceeds the return on many bonds. Moreover, the average rate of return on many short-term bonds is lower than the annual rate of inflation. This makes dividend-paying stocks all the more attractive.

In addition, unlike even the best Cash ISA, you can choose whether to reinvest the dividends or to pocket the payments. Either way, dividends from great companies with strong balance sheets and stable cash flow is a great way to build your passive income and increase your wealth.     

Cheap shares provide for better returns than a Cash ISA

Lastly, buying shares in reputable companies and holding them for the long term is another great passive income opportunity.

Indeed, buying shares after a stock market crash means many firms are on sale. After every previous stock market crash, the Footsie has rebounded. Moreover, the average return for the FTSE 100 since its inception is around 5%, far higher than even the best Cash ISA. And lower share prices mean greater potential capital gains as the index recovers once again.     

Don’t lose your wealth by putting all your money into a Cash ISA. I think there are better ways of making a passive income from dividends and stock market returns. Moreover, they allow you to keep access to your money. And while many shares are going cheap, the best time to start is now. 

The post Warning! Cash ISAs can destroy your wealth: Here are 3 ways I’d generate a passive income appeared first on The Motley Fool UK.

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• How much is needed in an ISA to target a £766.60 weekly passive income?
• After a 103% gain, this penny stock’s forecast to rise a further 106%. But will it?
• Will the stock market finally crash next week?
• No pension at 40? Don’t panic! A SIPP could be the answer
• Potentially 58% undervalued, is this a penny stock bargain?

Rachael FitzGerald-Finch 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.

What’s the pull?

It’s not hard to come across stories of investors making millions on company shares that were once trading for a few pence. This is, after all, exactly what happened to fast-fashion play ASOS. Trading at 4p a pop back in 2003, the very same shares now change hands for almost 3,200p. They were once above 7,000p!

The fact that stocks also trade at so low a price is often interpreted by new investors as a good thing since it allows you to buy what appears to be a huge initial position. A stock trading at 1p per share, for example, will give you a holding of 10,000 shares if you were to invest £100. Of course, this is irrelevant. It doesn’t matter if you have 10 shares or 10,000 if their value sinks to zero.

But there are other reasons to steer clear.

Reality check

The first is based on probability. For every ASOS, there will be thousands of businesses that merely tread water or fail completely (taking your money in the process). Winners spring to mind so easily due to survivorship bias.

To use an analogy, many will know that Usain Bolt holds the record for the 100m sprint. Few, however, will remember the names of those he beat to set that time (9.58 seconds), those who tried but failed to qualify, or know those who called time on their promising running career due to injury.

Second, many small companies see a stock market listing as a way of generating cash to make their blue-sky plans a reality. Unfortunately, just getting a business to profitability can take longer than expected, if it happens at all. This requires management to ask for more money to keep the lights on. More shares are then issued which, in turn, dilutes the value of those already held.

Third, penny stocks tend to be illiquid (hard to sell quickly) and, consequently, volatile in price. That’s less of an issue when markets are behaving themselves, but it can be an unmitigated disaster when they’re not.

A rush to jettison a minnow by investors is likely to result in a huge drop in price that doesn’t reflect its intrinsic value. If you’re actually able to sell, you may get back a lot less cash than you put in.

A better plan

Rather than diving in at the deep end of, I think all new investors should keep things as simple as possible.

By far the best way of doing this, at least in my opinion, is to invest in cheap funds that track the market return. You won’t get wealthy in a hurry, but you won’t lose your shirt either.

As an example, £100 stuffed in a fund tracking the FTSE 100 delivering a 7% annual return over 30 years would grow to £761 (excluding fees). Now think about if you were able to invest significantly more than £100 over that period of time. 

Bottom line

Investing in penny stocks can be a lucrative endeavour, but anyone contemplating entering this arena should be absolutely sure they understand the risks before doing so. If in doubt, steer clear.

The post Forget penny stocks. Here’s how I’d invest £100 appeared first on The Motley Fool UK.

More reading

• How much is needed in an ISA to target a £766.60 weekly passive income?
• After a 103% gain, this penny stock’s forecast to rise a further 106%. But will it?
• Will the stock market finally crash next week?
• No pension at 40? Don’t panic! A SIPP could be the answer
• Potentially 58% undervalued, is this a penny stock bargain?

Paul Summers 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.

Despite what some may think, it’s also easy to do. The five steps outlined below should be enough to get you on your way. 

1. Know yourself

Admittedly, this isn’t the most exciting step, but nor should it be. Before putting a penny of your money to work in the market, it’s vital to know your reasons for doing so. This can have a huge impact on what, exactly, you choose to invest in. 

The only ‘rule’ to abide by when setting goals is that they are sufficiently long term, such as saving for retirement, a child’s university fees or perhaps a house deposit. If you’ll need access to your money in less than, say, five years, you risk getting back less than you put in because market movements — over the short term — are unpredictable.

2. Get an ISA

Opening a Stocks and Shares ISA takes very little time but it’s a brilliant thing to do.

If you make an investment and that investment does well, you’ll pay capital gains tax on the profits you make. With an ISA, however, you can shield 100% of that profit from the taxman (along with any income you receive in the form of dividends).

This really matters. The more money you retain, the greater the effects of compounding over time, greatly increasing your chances of hitting the goals identified in Step 1.

3. Set up a direct debit

Having set up a tax-efficient account, your next job is to load it with cash. With an ISA, your total allowance is £20,000 for the current tax year. Don’t worry if you can’t find anywhere near this amount — simply deposit whatever you can afford.

You don’t need to invest everything in one go either. Indeed, a way of ensuring you’ll stick to investing (and don’t spend everything you earn) is to set up a direct debit with your bank that guarantees a fixed amount of your money is transferred over to your ISA every month. 

Investing on a regular basis also means you don’t put all your cash to work just before markets crash. 

4. Buy cheap funds

Here at the Fool UK, we like getting down and dirty with individual stocks. This, however, can be rather daunting for someone just starting out. Scrutinising companies also takes time and energy.  

That’s why I think new investors should initially concentrate on buying exchange-traded funds. This is a low-cost strategy that guarantees you to get the market return, rather than attempting to beat it. Warren Buffett — generally regarded as the best investor on the planet — thinks the vast majority of people should adopt this approach. 

5. Do nothing

The last step is arguably the most difficult of all. In an age of 24/7 news and Twitter rants, it can be easy to assume you should be doing something, anything, just to stay ahead.

Don’t be fooled. Counter-intuitive as it sounds, multiple studies have shown that the more inactive you are as an investor, the better your performance is likely to be. One reason among many for this is that costs are kept low.

Get comfortable doing nothing and you’re on the right road for stock market success.

The post Your quick 5-step guide for starting to invest in 2020 appeared first on The Motley Fool UK.

More reading

• How much is needed in an ISA to target a £766.60 weekly passive income?
• After a 103% gain, this penny stock’s forecast to rise a further 106%. But will it?
• Will the stock market finally crash next week?
• No pension at 40? Don’t panic! A SIPP could be the answer
• Potentially 58% undervalued, is this a penny stock bargain?

Paul Summers 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.

Fortunately, this simply isn’t true; even £100 can go a long way if you give it time. Before giving my thoughts on what to do with this money, however, I should mention that I’m taking a few things for granted. 

Some assumptions…

The first is that you’re already debt-free. If this isn’t the case, stop reading after the next sentence. Mortgage aside, debt should always be prioritised over investing, especially if the rate of interest you’re paying is high.

The second assumption is that you already have a bit of cash put away for an emergency or two. Lots of personal finance gurus suggest between three and six months of expenses. I’d simply shoot for a figure that allows you to sleep at night.

Third, you should already have a Stocks and Shares ISA or Self-Invested Personal Pension (SIPP). If not, you need to know that opening at least one of these accounts is a priority. 

Done. Now, what should I buy?

It can be tempting to jump into individual company stocks when beginning to invest. That might be appropriate if you’ve got a few thousand pounds to spend but it’s less optimal when you’re working with £100 since a significant portion of that money will be gobbled up by the costs of buying. 

By far the best strategy, in my view, is to put that cash to work in a fund that tracks a market index. An index is like a league table of companies according to their market value; the more valuable a company is, the nearer the top it will be. The FTSE 100, for example, contains the biggest companies in the UK. By tracking it, you’ll generate about the same return as the index.

The explosion of interest in this way of investing over the years means there now exists a huge variety of such funds to choose from; there are indices that track multiple markets, bonds, the gold price, even companies that specialise in autonomous vehicles. This allows you to spread your cash around, making it a good option for those who lack the time, energy, or inclination to thoroughly research individual companies. 

Don’t take my word for it. Legendary investor Warren Buffett thinks the vast majority of people would be best off buying shares in a fund that tracks the market rather than attempting to beat it. I’d say he’s worth listening to. 

From little acorns…

Let’s say you put that £100 to work in a fund tracking the FTSE 100 and did nothing for 30 years.

Based on an achievable 7% annual market return (and not taking into account costs or fees), that £100 would turn into £761, according to my calculations. If markets did even better (or you chose to invest in a fund that tracks the returns of, say, much smaller companies) and generated a 10% return on average over the same period, you’d have £1,745.

Sure, these numbers are hardly life-changing. They do, however, show what can be done with a small amount of cash that’s allowed to compound over time. Think of what could be achieved if you were able to put some extra cash aside every month!

The post How I’d invest £100 right now appeared first on The Motley Fool UK.

More reading

• How much is needed in an ISA to target a £766.60 weekly passive income?
• After a 103% gain, this penny stock’s forecast to rise a further 106%. But will it?
• Will the stock market finally crash next week?
• No pension at 40? Don’t panic! A SIPP could be the answer
• Potentially 58% undervalued, is this a penny stock bargain?

Paul Summers 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.

From betting ring to stock market

Many years ago, I started my working life in the world of horseracing. Specifically, I worked as a private handicapper, form-guide writer and tipster for a small company that provided data and analysis to a number of national newspapers and racecourses.

Handicapping horses is part science and part art. With full-time focus, skill and discipline, it was possible — in those days, at least — to identify and profit from valuation anomalies in the betting ring. However, I came to learn that the stock market offers a much simpler and surer way to build your wealth. In the beginning, though, I didn’t get it.

Penny stocks

When I first took an interest in the market, I naively assumed that all one had to do to make money was buy penny stocks with good stories promising massive future profits, and wait for their share prices to multiply. Today, on financial discussion boards around the web, I see many novice investors similarly drawn to the apparently life-changing potential of such stocks.

However, even if the company directors aren’t hopeless over-optimists, or as interested in feathering their own nests as anything else, or even occasionally outright fraudsters, the typical lack of cash flows of ‘blue-sky’ stocks and serial dilutive fundraisings are often ruinous for shareholders.

Fortunately, I learned quickly that simply putting money into ‘story stocks’ with uncertain assets and no cash flows didn’t cut the mustard as an investment strategy. Indeed, it was far riskier than backing horses from a position of knowledge and with a disciplined focus on valuation anomalies. Punting penny stocks, in my experience, was more akin to going to a casino and simply playing the roulette wheel until you’d blown all your cash.

FTSE 100

It was reading books about investing that opened my eyes to what the stock market really has to offer. Main markets, such as the UK’s FTSE 100, contain established, profitable businesses. In contrast to blue-sky penny stocks that are constantly asking investors for more cash, blue-chip FTSE 100 companies generally pay you cash (via annual dividends) for owning their shares. And because many of these companies increase their profits and dividends over time, the value of their shares also increases.

A simple way to enjoy these fruits is to invest in a low-cost FTSE 100 tracker fund. Effectively, you’re buying a small stake in every business in the index. If you’re looking to build a nest egg, you can buy the ‘accumulation’ version of the tracker, which automatically reinvests the dividends to buy you more shares. If you want the dividends as cash — say, to enjoy a higher-quality lifestyle in retirement — you can buy the ‘income’ version of the tracker.

Historically, the FTSE 100 has delivered a long-term, average total return (capital increases plus dividends) of around 7% a year. It’s a far saner way to get rich, in my opinion, than gambling in the flaky world of penny stocks.

The post Don’t waste your money on penny stocks! I’d invest in the FTSE 100 appeared first on The Motley Fool UK.

More reading

• How much is needed in an ISA to target a £766.60 weekly passive income?
• After a 103% gain, this penny stock’s forecast to rise a further 106%. But will it?
• Will the stock market finally crash next week?
• No pension at 40? Don’t panic! A SIPP could be the answer
• Potentially 58% undervalued, is this a penny stock bargain?

G A Chester 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.

You’ll probably have read many warnings about the dangers of investing in the stock market. But have you ever read any about the risks of saving cash?

Here I’ll explain why… for anyone aiming to build a £1m nest egg, the risk of failing to achieve your goal is higher for a cash saver than for an investor in the stock market.

Crummy cash

The best easy access Cash ISA I can find at the moment pays interest of 1.46%. The trouble is, UK inflation is running at 1.7%. This means while your savings are nominally rising at 1.46%, inflation is eating it all away and another 0.24% to boot. In other words, the real value of you savings is falling.

Let’s have a quick look at how this works in practice, using the example of a saver who puts £500 a month into the Cash ISA. The table below shows what happens over five years (numbers rounded to the nearest pound for simplicity).

Over the period, the saver deposits a total of £30,000 in the Cash ISA, earns over £1,000 in interest and, at the end of the five years, has savings of £31,095. However, taking into account inflation, the real value has fallen to £29,823. That’s a £177 drop in the purchasing power of the £30,000 deposited.

On this basis — an interest rate of 1.46% and inflation at 1.7% — it would take 213 years to build a nest egg with a real value of £1m, and you’d have to invest a nominal total of £1.3m to achieve it.

Relative returns

The good news for savers is that cash has delivered a positive real return over the longer term (since 1899). The bad news is it’s averaged a paltry 0.7%, according to a study by Barclays. It would take 111 years to reach the magic million, saving £500 a month at 0.7%.

According to the same study, the British stock market has delivered 4.9% a year in real terms. At this rate of return, a £500-a-month investor would build a £1m pot in 46 years. As you can see, the historical rates of return on cash and stocks suggest investing, not saving, is the way to go if you’re looking to build serious wealth.

How to invest

A popular way to invest in the stock market is with a low-cost FTSE 100 index tracker. This tracks the returns of the biggest and most successful 100 companies listed on the London market, including Shell, HSBC, GlaxoSmithKline and many other familiar names.

Your investment buys you a small stake in each of these businesses, and your stake becomes more valuable if their profits increase over time. Mostly they do. This is why the British stock market has that long-term real-rate return of 4.9%, despite two world wars, a depression, numerous recessions, and other events that have temporarily set the market back.

This is why, I say, if you’re aiming to build a £1m nest egg, forget a Cash ISA and look to the stock market to help you achieve your goal.

The post Forget a Cash ISA! I’d aim for a £1m nest egg with the FTSE 100 appeared first on The Motley Fool UK.

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• Potentially 58% undervalued, is this a penny stock bargain?

G A Chester has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended HSBC Holdings. 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.