There are a large number of misconceptions when people think about investing in the Stock Market. It is generally believed you need large sums of money to make it a worthwhile exercise. This is not true.
Although a pension is undoubtedly one of the best ways to save for the future, there are many additional areas you could be looking at to ensure a comfortable retirement. A pension normally works well due to the large length of time that someone saves into the scheme. It is this extended time horizon that I believe people should be looking to exploit elsewhere.
The problem in solely saving into a pension scheme is the uncertainty surrounding how much you receive back on retirement. The accessibility of a pension can also be a concern, as you are unable to release funds out of the pension either throughout your working life or after you have retired, outside of your tax-free initial lump sum. This is something that can be a very helpful during periods of high expense.
The amount someone needs to invest to make it worthwhile depends on a number of issues. Time horizon is certainly one of these. Investing a relatively small amount now, if held for about 30 to 40 years, should see significant growth.
For example, if you were able to invest approximately £3,000 now, and leave that amount invested for 30 years, it should be possible to achieve substantial growth between now and then. Although there are no guarantees with the market, I believe that providing you are invested into the right global areas, you could expect to double your investment, on average, every five years. Over 30 years, you would, therefore, expect your initial £3,000 investment to increase to about £96,000. If left for another ten years, you could be looking at more than £380,000.
Although it is obviously very easy for me to simply quote what sound like very impressive figures, investing in the Stock Market is not always that simple. Unlike the rate of interest provided on a bank account, the Stock Market can provide very volatile returns, that can cause an investment to rise and fall significantly over a relatively short time frame. If, however, this time frame is increased to over 20 years-plus, equities have historically always outperformed every other asset class, including property.
While I can not guarantee how markets will perform in the future, the historical performance of the market can certainly be taken as a guidance of what to expect. According to figures produced by Barclays, £100 invested in 1945, with dividends reinvested, would have increased to £107,609 by the end of 2005. Using the same historic figures, but with the initial £100 investment increased to £3,000, and you would be looking at an end figure of more than £3.2m.
It is the significant growth potential of the market which makes the requirement to invest large sums of money irrelevant when looking at the kind of time period mentioned above. Unfortunately, few people are financially able to afford to invest at the beginning of their working life, due to normal financial constraints. Investing 20 years down the line, however, denies you of the large time horizon, and robs you of the kind of returns which this should provide.
Michael Rankin is an investment manager in the Teessdie office of Wise Speke, and can be contacted on 01642 608855.
Comments: Our rules
We want our comments to be a lively and valuable part of our community - a place where readers can debate and engage with the most important local issues. The ability to comment on our stories is a privilege, not a right, however, and that privilege may be withdrawn if it is abused or misused.
Please report any comments that break our rules.
Read the rules hereComments are closed on this article