Over the long haul, shares have outperformed all other major asset classes such as property, bonds, cash savings and cryptocurrencies such as Bitcoin. One of the great things about shares in aggregate is they keep bouncing back from their lows and going higher still. You can see that effect if you look at the long-term charts of indices such as the FTSE 100 in the UK and the S&P 500 in the US.
Why I’d pounce while share prices are down
Meanwhile, the best time to put your money into share-based investments is when the stock market is down. But that might feel difficult to do because when the stock market is down and falling it is usually because the outlook is uncertain for the businesses behind the shares. Indeed, when the general economic news is murky, existing investors sometimes run for the hills and sell their shares. That can lead to the share prices under-valuing the underlying businesses, which can be good news if you are keen to begin investing in the stock market because there’s a good chance you’ll get more for your money.
You can get involved with shares in several ways. One way is to pick your own if you are prepared to learn all about investing and put plenty of time into researching your potential investments. If you are short of time, you could use a directed stock-picking service such as those offered by The Motley Fool, or you could invest in a managed fund. But I think one of the most effective ways to invest is to make regular contributions to a low-cost, passive index tracker fund that aims to follow the ups and downs of an index.
For example, I’m long-term bullish on the FTSE 100 index and believe a FTSE 100 index tracker fund is a decent investment vehicle. The index is driven by 100 or so big firms, which provides instant diversity and removes some of the risks you face from investing in individual companies. On top of that, the index is ‘self-cleaning’ and underperforming names are regularly booted out to be replaced with upcoming companies that are doing better.
Three steps
With the stock market down, I’d take three steps this January with the aim of boosting my retirement fund and aiming for £1m over time.
Step one: I’d choose a tracker fund that automatically reinvests dividends back in for me along the way because that would start me on the road to compounding my money. The newly reinvested dividends would buy more of the tracker fund that would itself receive dividends and so on. Compounding is key to generating wealth over time.
Step two: I’d set up my tracker fund in a tax-free wrapper such as a Self-Invested Personal Pension (SIPP), which provides tax relief on money paid into the fund, or in an Individual Savings Account (ISA), which allows the accumulation of investment gains free of tax when I eventually draw out the money.
Step three: I’d set up a regular monthly payment into my tracker fund from my monthly earned income with the aim of keeping it going and increasing it as my wages rise.
Good luck on your own investing journey!