Sunday 17 December 2017

The smart money is in the stock markets

Rory Gillen
Rory Gillen

Rory Gillen

Businesses usually make a higher return on money invested than money left in bank deposit accounts. This is one reason why you should consider investing through the stock markets rather than leaving your money on deposit.

If business people could not make better than bank deposit-like returns, they would surely just save through bank deposits.

If we all did that, demand for capital (savings) would be zero, there would be a glut of savings versus investment, and interest rates from bank deposits, too, would be zero.

As we can't know the future for sure, investors face economic risks and company-specific risks when investing through stock markets. The principle economic risks include recessions, inflation and deflation. The risks of poor performance by individual companies can be mitigated by investing in diversified funds.

It's worth remembering that, despite the recent global economic troubles, economic and business progress has been the norm over the past two centuries – in the developed world at least. Each decade has recorded progress in terms of economic output, incomes, property and stock market values. While no one has a crystal ball, history is on the side of risk-asset investing.

Being able to value an asset is also important, as the value you buy largely determines the subsequent returns you get. But most private investors are not equipped to value assets. For them, investing over time, in good times and bad, is a decent way of obtaining the 'average' value on offer in markets over time. And the average value on offer in the developed stock markets has delivered returns of between about eight and nine per cent a year over the past century, despite the intermittent downturns (bear markets).

Bank deposits have probably delivered average returns of four per cent a year over the same period.

Starting at age 35 and saving €500 a month in a pension would see you retire at age 65 with a lump sum of €294,000 via bank deposits earning an average of three per cent a year. The same savings programme in a global equity fund could see you retire with a lump sum of €606,000 – assuming returns of seven per cent a year from global stock markets.

The cheapest way for you to invest through the stock markets is to open an online stockbroking account where dealing costs are lowest. Exchange-traded funds are the cheapest fund types, and a simple investment strategy of continually investing in a global exchange-traded equity fund is all you need.

There is nothing wrong with saving through bank deposits, but it is better to know that you have choices, and to understand those choices and how to control the risks.

Government policy in Ireland discourages saving through penal taxation. Any residual incentives are still geared towards direct property investing, where risks are much higher as you usually need a loan to buy physical property. Borrowing involves a further layer of risk.

You do not need to borrow to invest in stock markets. Once you have about €1,000 saved, you can invest in a fund using an online account with minimal cost. You can build an asset base over time 'brick-by-brick', and without any debt.

  • Rory Gillen is founder of and author of 'Three Steps to Investment Success'

Sunday Indo Business

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