Newcomers to stock investing might wince at the thought of ploughing their money into equity markets today. Financial markets remain extremely volatile and the FTSE 100 was down again and moving back towards the 6,000-point marker last time I checked.
It isn’t Covid-19 news flow that’s caused them to step back again. It’s the threat of a total breakdown of trade relations between China and the US that has caused markets to retrace. Fresh bouts of Twitter criticism from President Trump towards his Asian counterpart President Xi shows that the situation is worsening rather than easing.
The situation is particularly tough for those needing to make some serious money in a short period of time. Say you’re 50 years of age, with no savings in the bank and are looking to retire in 15 years’ time. Studies show that you can’t rely on the State Pension to give you a comfortable retirement. Yet the macroeconomic and geopolitical consequences of Covid-19 have raised the risks for companies and investors alike, making sensible share investments much more difficult.
Avoid the low-yield trap
If you find yourself in sight of retirement, though, it’s clear that you need to accept some risk in order to build any sort of decent nest egg. Cash products are some of the safest products out there, but they are unlikely to generate the sort of returns to help you retire in comfort.
Take the Cash ISA, for example. Data from Moneysupermarket shows that Ford Money offers the best-paying of these products right now. But it has an interest rate of just 0.85%. This is hardly the sort of yield to help you make a life-changing return on your money.
Let’s say that someone puts £500 per month into that particular cash account. Contributions over a 15-year period would come in at £90,000 but only yield a total return of around £95,200. That seems to be a hell of a lot of effort to make a profit of just over five grand. Studies also suggest that this sort of nest egg falls well short of what the average person will need to retire comfortably. The paltry State Pension won’t be enough to save your bacon either.
Besides, this calculation assumes that the interest rate will remain at current levels during the next decade-and-a-half. If anything, rates are in danger of falling further given central banks’ appetite to continue loosening monetary policy.
A better way to retire
I’m not content to lock my money into one of these poor-paying cash products. Instead I’m building my retirement fund by investing in a Stocks and Shares ISA. It can be argued that share investing carries much more risk. But the evidence shows that the average long-term investor tends to make a return of between 8% and 10% per year.
So let’s say that someone were to use that £500 each month to invest in stocks instead. Over the same 15 years, they could expect to make up £199,200, more than double what they would have likely made with a Cash ISA. The FTSE 100 might still be volatile, but such bouts of choppiness are nothing new. With the right guidance it’s still possible to make a mint from British blue-chips, even in a challenging post-coronavirus landscape.