Ten Steps To Financial Freedom Step 7: Invest! Seriously, It’s Simple
- Step 1: The Miracle Of Compound Returns
- Step 2: Get Control Of Your Money
- Step 3: Beat Banks At Their Own Game
- Step 4: Dump Your Debts
- Step 5: Make It Home Sweet Home
- Step 6: Retire When You Want To
- Step 7: Invest! Seriously, It’s Simple
- Step 8: Keep The Taxman At Bay
- Step 9: Make Your Child A Millionaire
- Step 10: Protect Your Wealth
What would you do if we said you were missing out on an investing strategy that, in the long run, has produced returns that far outweigh those offered by cash in a saving accounts or government bonds. Well, meet the stock market.
Internet bubble and credit crunch included, over the last 100 years or so, the UK stock market has returned an average annual rate of around 11%, outperforming bonds and cash by around 5% to 6% a year.
Although two big stock market falls since the turn of the century have shaken many people’s belief in shares, they also tend to do pretty well over shorter periods, too. For example, over period of five years, the returns from shares have historically beaten cash around 80% of the time. Over ten years, this rises to about 90%, and for twenty-year periods, it’s 98%. With odds like that, we firmly believe that investing in the stock market remains one of best ways of building your wealth over longer periods of time.
Yet, if you read the financial press, you’ll find no end of scare stories about so many billions being wiped off the stock market whenever there is a particularly bad day. Investing in shares certainly means you’ll have your up and downs. For example, you can expect to see a fall of 10% or so roughly once a year on average. But seasoned investors often welcome market falls as it gives them a chance to buy the companies they like at more attractive prices.
Investing in the stock market: funds vs. shares
You can invest in the stock market by buying shares in an individual company, or by investing in a fund, which consists of a variety of shares in different companies – sort of like a basket of shares.
With shares, as the value of the share itself (a publicly-traded company) goes up or down, the value of your investment does the same.
With funds, the value of your investment is tied to the value of the fund, which is reflective of the value of the shares the fund is comprised of. It follows that one share’s movement has a smaller impact on the fund as a whole, and thus on you, than it would if you had all your money tied up in that share alone. You do pay a price for the relative stability of funds, and that’s the fund management fee – all funds have these.
Perhaps the biggest challenge with the stock market is knowing what to buy, when to buy it and when to sell it. This is where our stock picking newsletters can help, and this page introduces them in more detail and outline which service might be right for you.
Introducing the index tracker
Individual shares and funds not to your tastes? Then what’s known as an index tracker might a better investment option.
An index tracker is a fund that copies one of the main stock market indices (like the FTSE 100, for example) so that by buying into a tracker, you can buy the overall market without having to pick individual shares. The FTSE 100 contains the hundred largest companies on the UK market, with each company weighted according to its market value. This means movements in large, usually more stable companies like BP, GlaxoSmithKline and Vodafone affect the FTSE 100 index much more than smaller companies.
A cheap index tracker will cost you 0.1%-0.25% a year in charges whereas a managed fund, where a fund manager chooses shares for you, could set you back around 1.5% a year, plus an initial charge of 5% for investing your money in the first place.
If you want to know more about investing in shares and funds, try some of these Fool Guides.