The start of a new year is perfect for taking stock and revisiting your goals and plans. Incorporated into many of the decisions and actions we take is how we plan to fund short-term and long-term goals.
Funding future goals, where things will cost more than they do today, is especially topical now, given the high inflation we are experiencing. Inflation is the silent killer of wealth. It kills the effort we have put into working hard and saving. It kills the wealth we can pass on to our loved ones.
How do we keep inflation at bay over time?
We need our investments to grow faster than inflation – with the difference in inflation and our total return being your “real return”. Your real return is the number that matters most.
With history as our guide, one of the best places to get a real return is in equities – also known as the share market. Put simply, equities are ‘the great businesses of the world’. They sell real things, to real people and are run by real people.
Investing in equities is an excellent plan for meeting and funding long-term goals, especially the goal of living a comfortable retirement. Doing so will eventually create an investment portfolio that will replace your need to work for an income.
Like all good intentions, there are always reasons not to get started. Here are some of the objections often encountered. Most of us can relate to at least one of them.
1. “I DON’T SEE THE POINT OF INVESTING IN THE FIRST PLACE.”
Any decision you make with your money—even not investing—is an investment decision involving risk and rewards. You’re focused on the risk involved in investing. But what are you risking by not investing?
- You’re risking today’s money having less value in the future because of inflation.
- You’re missing out on the magic of compounding, which Albert Einstein is said to have described as the Eighth Wonder of the World. Assuming an approximate average 9% return, as the ASX 300 has returned historically, money invested in the share market doubles every seven years.
- You’re forgetting that diversification—spreading your investments across many companies—is a powerful way to minimise risk.
When it comes to personal goals, everything has a trade-off. Most people don’t have enough money saved to be able to live adequately in retirement without earning some kind of investment return. Simply put, by not investing, you risk outliving your money.
2. “I’M TOO LATE. THE TRAIN HAS LEFT THE STATION.”
It’s natural to regret decisions you’re unsure about. But it’s never too late to invest. Every day, we expect the stock market to go up. Otherwise, investors would find other things to do with their money.
3. “WHEN IT COMES TO INVESTMENT ADVICE, I DON’T KNOW WHO I’M SUPPOSED TO TRUST.”
Here’s the good news: You don’t have to “trust” anyone. Just trust the market. No human being can tell you more than the market has already told you through setting prices. Markets are always reacting to new information in real-time. Anything you hear a pundit say on TV or read on an internet message board is yesterday’s news. And it may seem obvious, but you have to remember: There’s a difference between fact and opinion. Cultivate a healthy sense of scepticism when it comes to financial punditry and remember that it’s not news but entertainment. And if you need a trustworthy sounding board, consider meeting with an independent financial adviser whose interests align with yours.
4. “IT’S TOO HARD TO FIGURE OUT WHEN TO GET INTO—OR OUT OF—THE MARKET.”
Human beings have a natural urge to transact. But getting into and out of the market is gambling, not investing. If you treat the market like a casino, and you’re picking stocks or attempting to time the market, you need to be right twice—in an aim to buy low and sell high. Fortunately, you don’t need to time the market to have a good investment experience. Professor Eugene Fama, a Nobel laureate in economic sciences, showed that it’s unlikely for any individual to be able to pick the right stock at the right time—especially more than once. Once you decide to be a long-term investor, the timing debate is off the table. And that’s a big relief. When you buy the whole market, you’re investing in human ingenuity to find productive solutions to the world’s problems.
5. “I’M AFRAID I’M GOING TO LOSE IT ALL.”
You’ll face big market downturns if you’re lucky enough to live a long time. You’re much more likely to “lose it all” with concentrated investments than with a well-diversified portfolio. Individual investments may go to zero, but the modern-day (US) market has been around for almost a century, has an average annual return of 10%, and has never temporarily declined more than 43% in a year.
6. “I DON’T KNOW WHAT I DON’T KNOW, AND THAT MAKES ME NERVOUS.”
It’s OK to be nervous! If investing were a slam dunk, there wouldn’t be a positive expected payoff. For an investment to offer the possibility of a return above money-market funds, it needs to carry risk. And when it comes to deciding how to grow your hard-earned money, the stakes are high. Uncertainty is scary, but without uncertainty, there would be no opportunity. Share market behaviour is uncertain, just like most things in our lives. None of us can make uncertainty disappear, but dealing thoughtfully with uncertainty can make a huge difference in investment returns and quality of life. The market is also volatile in the short-term – and that volatility cannot be avoided. It helps to think of volatility as the admission price to get longer-term superior returns that what lower volatility (fixed interest) investments can offer. Again, focus on the real return and try to accept that volatility is a given.
7. “I ONLY WANT TO INVEST IN COMPANIES I’M FAMILIAR WITH.”
Stock markets contain all of the publicly traded companies out there. Every company has an incentive to do better. Investing in human potential across a broad range of companies is more likely to pay off than predicting which individual company will perform best. You can do well without having to outguess the market.
8. “I’M AFRAID THERE’S GOING TO BE ANOTHER FINANCIAL CRISIS.”
History shows us that there’s always going to be another financial crisis—and another recovery. Every crisis has a different cause, so it feels different every time, but the market has always delivered a positive return once things settle down. Crises, by definition, are not predictable. Markets are forward-looking and remind us of the power of human resilience.
9. “I’M OVERWHELMED. IT’S JUST TOO MUCH TO THINK ABOUT.”
Inertia is a powerful force. Thinking a little bit about it right now means worrying a lot less in the future. Inaction comes with a price, but this is where an independent financial adviser can really help.
10. “I DON’T HAVE ENOUGH MONEY TO INVEST.”
When it comes to investing for your family’s future, there is no minimum. The first and most important step toward investing is saving. It’s human nature to procrastinate. Half the battle is just getting started. This can mean “paying yourself first” by directing a small percentage of each pay into savings. Putting money aside regularly becomes a feel-good habit, like exercise. You can witness your own incremental progress and the boost in self-esteem it brings. You’ll be surprised by how easy it is to set this in motion, and you’ll feel good—for yourself, and your family.
Just look at these numbers: If you invest $100 today and then $100 per month for 30 years with a 10% return, you’ll end up with almost $200,000.