Over the years I’ve been a financial writer, I’ve spoken to many people who believed that buying shares is basically the same as gambling. Needless to say, I don’t agree with this view.
Indeed, I’m worried that by keeping savings in cash and avoiding the stock market, many people are missing out on the opportunity to build wealth to support their retirement and other ambitions.
Stock market vs cash
I understand the fear of losses which goes with stock market investing. You can lose money. Indeed, it’s true that some shares are little better than gambling chips. Small, speculative businesses that are losing money and lack funding are a recipe for big losses. Very few make it big.
However, it’s easy enough to avoid buying these shares by focusing on larger, profitable companies with some history and a decent track record. Safer still, in my view, is to focus on index funds, such as FTSE 100 tracker funds. These buy the whole market, so your exposure to individual company problems is minimal.
I admit that even the most conservative stock market investments will rise and fall in value sometimes. But I think the risk of permanently losing money is quite low, if you take the right approach. I’ll explain more about this next.
Buying shares could triple your savings
Over the last 100 years or so, the average return from the UK stock market has been around 8% each year. Some years have been better, some worse. But that’s the average.
Investing £100 per month at 8% for 25 years would create a fund worth about £94k. By comparison, £100 per month saved in cash with an interest rate of 1% would be worth about £34k after 25 years. So, the stock market investment would be worth nearly three times as much as the cash savings account.
This highlights an important point. Stock market investments tend to work well over long periods. Over short periods, they’re less predictable. For this reason, I’d only buy shares with money I didn’t expect to need for at least five years.
How to invest in the stock market
When it comes to buying shares, there are lots of choices. But billionaire US investor Warren Buffett believes the simplest choice is best for most people. Buffett’s advice is to invest in an index fund. That’s a fund which tracks all the stocks in a specified market.
In the UK, the biggest and most popular index is the FTSE 100. This includes the 100 largest companies listed on the UK stock market. Companies such as Tesco, BP, housebuilder Persimmon and consumer goods firm Unilever are all members of the FTSE 100.
I reckon the simplest, safest, and cheapest way to start buying shares is to open a tax-free Stocks & Shares ISA and pay money into a FTSE 100 index fund. Many funds allow monthly payments of as little as £25 per month. And by setting up a direct debit, the investment can be completely automated.
Over short periods, cash is useful for emergencies and planned spending. But, for long-term growth, the stock market has always outperformed cash. I expect this to continue.
