What a year: 2020 has been frightening, painful and, for many, desperately sad.
So invest in the stock market now? Surely you must be mad, I hear you say. In my view, exactly the opposite is the case.
Let me explain. There are some old City sayings which, despite being hoary, can also be quite helpful.
Most small investors can easily and cheaply invest in low cost index trackers to at least benefit from the effects of compounding over the decades
‘There are those who don’t know, and those who don’t know that they don’t know,’ is one rather damning proverb about the ability – or lack thereof – of investment experts to predict the future of the markets.
More constructively, another oft-quoted phrase is: ‘It is not about timing the market, but time in the market.’ The fact is, sticking with shares means you will benefit from the miracle of compounding, or the rolling up of dividends over time.
There is also the rather useful ‘rule of 72’, where you divide 72 by the return — be it a dividend or interest payment – and this will tell you how long it will take for your money to double.
In the old days, a 7 per cent return was not unusual, so 72 divided by seven gives you just over ten years.
Sadly, at 3.5 per cent, today it would take 20 years. But you are at least increasing the value of your money and not seeing it eroded away in a bank account.
When it comes to picking stocks, you only have to look at the performance of most fund managers to see that, despite all their apparent expertise, this is not easy. However, exceptional events throw up opportunities.
If, as the pandemic ripped around the world and stock markets took fright, you thought we would get through this crisis with a vaccine and technology, then here was a great opportunity to buy into stock markets around the globe at cheap prices.
I appreciate that hindsight is a wonderful thing. Now, with foresight, I can see a global recovery and with it a good sign for global shares in the medium term.
From my own experience, the only time I have seriously lost value has been when I have not been invested.
Most of us can easily and cheaply invest in low-cost index trackers to at least benefit from the effects of compounding over the decades.
It may sound dull, but dull in times like these can be comforting. Rule one of investing is ‘don’t lose money’ – exactly what will happen if you put it in the bank.
- Read Mr Money Maker’s column every Saturday in the Daily Mail’s City pages.