If you are not quite sure about how financial markets work, or more importantly, how to benefit from them yourself, I hope this blog series gives you some understanding and ideas.
When you look at The Growth of Wealth Chart, it shows you the growth of £1 relative to the following aspects:
Inflation
Cash
FTSE All Share
Value Companies
Small Companies.
Looking at the chart, as long as you have a long-term investing horizon, say a 30-40 year spending time frame (otherwise known as retirement), would you be happier if you had invested in the average of the UK all share or stayed in cash (treasury bills)?
Someone said to me over coffee today, “yes Rob, but the market is high!”.
My response was simple: “How do you know?”.
After both admitting the market could keep going up or indeed down, we agreed no one really knows.
I then asked, “more importantly, what does it matter if the market is near the top now (whatever the top is) when you're investing for the next 40 years? Can we agree it doesn't matter that much whether the FTSE drops down to 5,000 points or rises 10,000 points, as long as we both agree it will eventually get to 15,000 or even 20,000 in your lifetime?”.
We agreed.
If you have been a sensible investor in the past you should have already “beaten the market”, so to speak, by using the simple yet effective strategy of Pound Cost Averaging (PCA) your spare cash into the market over many years. In other words, drop your money in over time. If you are very good, you will have tried to "double down" as much as possible/affordable during the times when the market dipped temporarily, such as in 2007 and going back further; 2000-2003; 1987; and 1974 (when inflation was around 24%). By implementing this simple strategy, you would have beaten the overall return from the “the market”.
Going back to the chart I said, “Does it, in hindsight, seem like a sensible strategy to forget about the short term speculation on the 10 o’clock news and on the front pages of the papers, and instead focus on the long term plan”. Again my guest was in agreement.
“I see what you mean now, Rob. What does it matter if the market falls significantly tomorrow or in 6 months, or over the next two or three years when my investing time frame is 40 years? In fact, it is actually more like 80 years as we are discussing some investments for my children and their children”.
If only most people had in place understanding, systems and most important of all, an actual plan in place. As Warren Buffett has said, “investing is simple, but not easy”. It is made a hell of a lot easier by having a plan and sticking to the plan.
I am not saying there are no risks when it comes to investing. But as Sir Buffett’s (I have knighted him at my own leisure using my equally frivolous, self-anointed title of Lord of Liverpool), mentor famously said, “to be an investor, you need to believe in a better tomorrow”.
The two biggest risks to long term wealth are as follows:
Not saving enough for retirement.
Spending too much in retirement.
We are back to having a plan. You need to work out your numbers and build a plan for your wealth (especially if you don’t have any yet!).
So invest sensibly, take a long term view, and stick to your plan. This includes dripping your money into the market over time, bit by bit, and try to invest more when the market "crashes" (temporarily). In retirement, be very careful about what you take out when there's a crash. Tightening your belts at this time can make your retirement pot last an extra decade or more.
If you would like to have a chat about your financial situation or have any queries, then please get in touch as we are here to help.
