The best way to boost your wealth

The latest performance figures are out and it's clear that shares remain an excellent way to build long-term wealth.

Many people are very reluctant to invest in the stock market. They worry about the risk and the prospect of stock market crashes. I can understand those fears, but I still believe that long-term investment in shares is a great way to build wealth. It’s true that shares are risky, but if you invest carefully over the long-term, the potential rewards outweigh the risks.

Let’s look at some new figures to see how shares have done:

Real investment returns by asset class (% per year)

*The ten year period is from 1 January 2001 to 31 December 2010. All other periods end on 31 December too.

Source: Barclays Equity Gilt Study 2011

The first point I’d stress is that these figures show ‘real returns.’ In other words, they’re in addition to inflation. So in 2010, the UK stock market rose by inflation plus 8.9%. That’s a very strong performance – shares beat all comers last year.

Sadly, the stock market’s performance over the last decade was much weaker. On average, it delivered a real return of 0.6% a year, only just beating inflation. You’d have done better in cash which delivered a real return of 1.1% a year.

Looking at the figures for the last ten years, it seems that shares have been a strong short-term performer but weak over the long-term. So why am I arguing that shares are less risky if you invest for long periods?

Firstly, it’s because I recognise that the stock market often has rotten years when share prices tumble. The last such year was 2008 when the UK stock market crashed by 31%. But over longer periods, shares tend to win out. Look at the above table:  shares were the top-performing asset class over 20 and 50 years.

Secondly, I’m actually quite comforted by the figures for the last ten years. Yes, the performance was weak and you’d have been better off in bonds or cash.

But let’s not forget, this is a decade that started in January 2001 with the end of the dotcom crash, included 9/11 and the ensuing economic downturn, and ended with the worst banking crisis since the 1930s. Yet in the end, in spite of all that drama, shares still beat inflation. I think that’s pretty impressive.

Still not convinced?

Well, let’s look at some decade-by-decade figures going back as far as 1900.

Real investment returns (% per annum)

Shares were the top-performing asset in eight of the last eleven decades. Even better, when you just focus on more recent times, they were the top performer in six of the last seven decades.

Property

Now I know that some readers are probably screaming at the screen by now.

“Why hasn’t this moron mentioned property yet? Even by the generally low standards of journalists, this Bowsher guy is useless.”

I’ll start my reply with an excuse - it’s hard to find accurate data for property. I can find data that tells you what’s happened to house prices over a long period but these figures don’t include rents paid to landlords. That’s a problem because all of the figures for shares, bonds and cash include dividends or interest payments. So it’s hard to compare.

Moving away from past performance, I admit that property has one big advantage over shares – it’s much easier to borrow against  property than shares. So if you have £50,000 to spare, you can use that as a deposit to buy a home worth £200,000. But with the stock market, if you want to gain greater exposure to shares than £50,000, you’ll have to take a lot of risk and learn how to use complex and risky instruments such as contracts for difference.

The downside for property is that it’s riskier than some people realise. For most of us, our ‘property portfolio’ consists of just one or two properties. But what if a new high-speed railway is built near to your home? Or the big local employer shuts its factory? The value of your property could fall significantly. Shares offer a great way to diversify and you can get exposure to a wide variety of industries and countries.

Going forward

As I write this article, the stock market continues to fall in response to the terrible news coming out of Japan. The situation in Japan is very upsetting but it doesn’t put me off buying shares for the future. Bluntly, it means I can buy shares more cheaply for my pension pot. I’m happy to carry on investing in the stock market for my retirement.

I’m also happy that I own a flat in Central London. I reckon that this combination of shares and property is right mix for me.

If you’re not sure whether you should take the risk of stock market investment, then you should take the time to look at your financial picture as a whole. What are your financial goals and what do you need to do to achieve them? Do you need to buy shares to get the extra cash you need to achieve your goals? Find out more in Five steps to reduce your financial fear.

And if you’re not sure how to invest in the stock market, take a look at The best investments for your ISA.

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