Shares are for life, not just for Christmas: Long-term investing in shares
July is an exciting time of year for us at Finance Women. As the beginning of the financial year, it is a time to look forward and potentially launch into new endeavours, financial and otherwise. Investing in shares is a great way to make our money work harder for us, and now is a fantastic time to look into developing a share portfolio as the ASX/Russell Long Term Investing Report has just been released. This report always gives us a good idea of how the share market is trending, which in turn allows us to make informed choices about how we invest our money. One of the reasons we love this report is that it shows us – in real terms – how the long-term approach to investment almost always gives better returns than other methods of investment.
Quite often, all that many of us hear about shares is what we catch at the end of the news, and too often the phrase “…today, shares dropped to…” is uttered, which is hardly reassuring. Constantly hearing about rises and falls can make the share market seem highly unreliable, and leaves many feeling unsure about investing in such a seemingly unpredictable landscape. What you may not realise, though, is that these fluctuations are only a tiny pattern in a much larger picture, and that overall, the long-term investment market in Australia is remarkably healthy.
Let’s take the time before December 2015 as an example.
1 year shares: nothing to get excited about
During the year from December 2014 to December 2015, investment returns fluctuated wildly, but essentially they evened out so that by the end of the year, shareholders found themselves with the same amount of money as 12 months earlier. Now, in some situations, one might say that it would have been better to put that money into a term deposit, which would have given a return of at least 3%. After all, the shares didn’t lose any money, but they didn’t really make any money either. However, one year isn’t long enough to accurately gauge the success of a share investment. If we look back twenty or even ten years, we can see a very different, much more positive picture emerge.
10 year shares: looking pretty good
Let’s now look back ten years: from December 2005 to December 2015. The average return on Australian shares was 5.5%, which is well above the inflation rate. This means that – even though the cost of goods and services increased over those years – the average long-term investor ended up with more money to spend on goods and services at the end of 2015 than they had in 2005. This is even accounting for the fact that the Global Financial Crisis happened in 2007-2008, which shows how strong the positive growth is.
This is the goal of long-term investment: to increase your overall ‘purchasing power’.
If we consider these figures in real, monetary terms, we can see that with an investment which returns 5.5% per year for ten years (providing the shares are left undisturbed for that time) compounds/gives a return of 70% for that period. If the initial investment was $100,000 in 2005, it was worth $170,000 at the end of 2015.
20 year shares: hard to beat
When we look back twenty years from December 1995 to December 2015, the picture is even better: the long-term rate of return for that period was 8.7%. This is even further above the inflation rate and means that the investor who was truly in it for the long-term became decidedly more wealthy. An investment returning 8.7% per year for 20 years compounds to a total return of 430% across that period. If we take the same example as before, and the initial investment was $100,000 in 1995, it was worth a staggering $530,000 at the end of 2015.
Benefits of long-term investing in shares
As you can see, the longer you invest in shares, the greater the ultimate return will be. History shows that there are few, if any, ten year periods over which the share market showed negative returns. This is why we always suggest that investments in the share market are best made for the long-term. Ten years is a good place to start, and if you can invest over even longer periods than that, it is well worth it.
If you are interested in reading the most recent ASX/Russell Report you can do so here. If you would like to discuss how you can use this report and its insights to shape your own investing, please give us a call, and we can help you set up your own long-term investment plan.