The risk of poor returns is probably the main risk every long-term investor should be afraid of.
Failing to get the returns you need will mean you don’t achieve the goals you have in life.
It means you can’t buy freedom and opportunity. You won’t have peace of mind.
Long-term investors should strive for the best returns they can get for their money. This means you could retire early, pay for your children’s education, support the causes you love and never have to worry about medical bills.
To avoid the risk of poor returns, you need to know the truth about money and investing.
The wrong investment strategy can lead to the risk of poor returns
Let’s take a step back and think about what money really is.
Money is purchasing power. It’s the thing you use to buy the goods and services you use.
Over time the costs of those goods and services increase. This is called inflation.
Inflation is a risk that goes hand in hand with the risk of poor returns.
If you don’t increase the value of your savings, you don’t increase your purchasing power. Which means that you need to use more of your savings just to buy the same stuff year after year.
Do this for long enough and it’s a sure-fire way to go broke.
So, this is the reason we invest. To increase our purchasing power.
It’s so important you invest in the right asset though and for most people, this will mean using a mix of equities (listed companies) and bonds (loans to listed companies or governments).
You need to decide whether you want to be a loaner or an owner.
If we look back over 120 years of investing data we can see that investing your money in UK bonds has provided an average real annual return of 1.44% per year after accounting for the impact of inflation.
However, the average real returns from UK equities over the same period has been 5.35%. Nearly four times greater! (data sourced from Vanguard).
So why doesn’t everybody just invest in equities?
There is a risk of poor returns if you don’t embrace the great companies of the world
Most people don’t invest all their savings in equities and instead take a multi-asset approach because they believe the stock market is risky.
Here at Minerva Money Management we define risk as losing all your money.
Holding a portfolio or a fund of the great companies of the world has never lost anyone all their money.
Stock markets have never permanently declined.
Look up the price of the FTSE 100 or S&P 500 share indices on the day your parents were born and now compare that to the price today.
Equities and the stock market are the world’s biggest and best businesses. Run by some of the brightest minds in the world. When you buy units in a global equity fund you are basically owning a share of these companies. Owning a share of their earnings, cash flow and net assets.
Yes, the price of these great companies goes up and down day by day and minute by minute but that is just the panic and over-confidence of the crowd.
In the long run, a company’s share price will revert to the rising trendline if it is a successful business.
When investing, remember you are buying units not price. So, it is in your interest to see the stock market falling so you can pick up a bargain ready for when markets inevitably rise.
Even in times of economic difficulties the great companies of the world will protect their capital and move out of risky business ventures and into opportunity.
The global stock market is intrinsically linked with human progress.
If we look back over thousands and thousands of years we see nothing but progress. Why should the future be any different?
Carl Roberts, Director
If you want to learn more about this topic, please find the link here.
For more information about our fund the YFS Intelligent Wealth Fund can be found here: Hargreaves Lansdown or AJ Bell
Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
