Businesses, collectively, will always produce a higher return on monies invested than can be earned from bank deposits. This simple truth is the reason why one should consider investing through the stock markets, which cover all business sectors, including property.
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.
However, as we can’t know the future for sure, investors face economic risks and company-specific risks when investing through the stock markets. The principle economic risks include recessions, inflation and deflation.
The risks of poor performance by individual companies can be mitigated by investing through 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 and 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 receive. But most private investors are not equipped to value assets. For them, investing 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 circa 8-9% per annum over the past century, despite the intermittent downturns (bear markets). Bank deposits have probably averaged returns of 3-4% per annum over the same period.
Starting at age 35 and saving €500 a month in, say, a pension would see you retire at age 65 with a lump-sum of €294,000 via bank deposits earning an average of 3%. That’s circa 2 times the money (€150,000) you invested. The same savings programme in a global equity fund could see you retire with a lump-sum of €606,000, or 4 times the monies you invested, assuming returns of 7% annually 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, which offers you exposure to hundreds of different companies across the global markets in a single fund, is all you need in order to obtain the returns on offer.
There is nothing wrong with saving through bank deposits, but it is better to know that you have choices, to understand those choices and how to control the risks.
Unlike in the UK, current government policy in Ireland discourages saving through penal taxation at every turn. Any residual incentives are still geared towards direct property investing, where risks are much higher as mostly you 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 circa €1,000 saved, you can invest in a fund using an online account with minimal cost. You can build an asset base over time in the stock markets ‘brick-by-brick’, and without any debt.