The quick and simple way to beat the banks
Are you financially comfortable?
Even though the government takes every opportunity to say that the economy is improving, many of us are still feeling the pinch. It seems that we all want more money, but no one knows how to get it.
Sure, there are people who obviously do know how to make more money (some are perhaps too good at it!); in everyday life, though, few of us feel particularly well off.
This probably isn’t surprising. Money had no part in the school curriculum until very recently, and with maths lessons focusing on the apparently essential trigonometry and algebra, learning about the things that everyone would actually benefit from – like the impact of compound interest, understanding mortgage rates and the terrifying bogeyman that is the stock market – still means figuring it out for yourself.
The frustrating thing is we are also aware that we should save. Of course, that isn’t always easy, and the miniscule rates offered by the banks simply add insult to injury. The elephant in the room is we know that we won’t earn much money with a savings account, yet other options terrify us.
The stock market is particularly fear-inducing:
“I don’t know which company to invest in.”
“I don’t trust the stock market.”
“Won’t it swallow our money if we are not investment gurus?”
Want to know the irony here? Most of the so-called “investment gurus” are rarely worth their own fees, doing little more than guessing what will happen next – sometimes they luck into getting it right but they’re often wrong. Over time those fees could erode a huge chunk of your savings, and the investment guru gets paid even if he makes the wrong choices.
Pretty unfair, eh?
Investing probably isn’t what you think it is
TV and films like to show investors as people who spend hours every day watching lots of numbers across multiple computer screens, screaming into telephones and looking one bad decision away from a hospital bed. It’s no wonder ordinary people are put off! “I have a job, a spouse, a child and more than enough stress; as if I have spare hours to monitor share prices. I barely have time for a bath.”
In reality, investing is nothing like that. Or at least, it doesn’t have to be if you aren’t aspiring to be like the Wolf of Wall Street.
Let’s break it down. Who really wants to:
- Constantly monitor shares to buy low and sell high?
- Select individual companies in the hope of finding a ‘winner’?
- Take unnecessary risks?
So what’s the alternative?
Ultimately, the opposite.
The stock market has always gone up over time. If you believe it will continue to do so, and have at least five or ten years before needing the money, then successful investment really boils down to one thing: putting money in the whole market and leaving it there for the long term.
It’s as simple as that! (In case you’re wondering, no, this doesn’t mean there aren’t other good places to invest, or that you can’t lose money in the stock market and get back less than you originally invested. It just means that over a longer period of time, if you invest in the whole market rather than buying shares in individual companies, you should have more money than you put in. If you’re thinking of investing to fund an incredible birthday party for little Billy next month, that’s not such a good idea.)
It’s just mind over matter
Okay, so you’ve put money in the stock market. Now what?
Just stay put.
We all know that the stock market is always going up and down, and when the “down” bit happens we get scared, want to take all our money out and stuff it under the mattress where it won’t cause cold sweats. But, just like those embarrassing moments where we forget what we were going to say just as we need to say it, this is our brain making a poor choice.
The truth is, trying to work out when the market will go up or down consistently is impossible; it’s just something to accept. Unless you need that money immediately you should try to relax, because whenever it has dropped it has always gone back up. Sometimes quickly, sometimes not – but if you have taken your money out then you won’t benefit when it does.
In other words, the important thing is how long you leave your money in the stock market, not jumping in and out as the market moves. Of course, it’s also essential that you consider how much risk you are willing to take and pick appropriate investments in line with that. If that level of risk changes over time, you may decide to make adjustments to your investments, too. But overall, you’re investing for the long term and that means you shouldn’t pay too much attention to short-term fluctuations.
This is great news, as the simplest thing to do is choose a cheap fund, set up a direct debit for regular contributions and then get on with our lives.
There’s enough drama in life without adding more complexity, and your wealth doesn’t have to suffer because of that. Although the pinch may still be being felt, a little planning now can help us avoid a real struggle later on.
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