Investing in stocks feels out of reach for many people who ask themselves “should I invest in stocks now?” Buying stocks can seem risky and complicated, especially at the current time. The reality of buying stocks is also often distorted by media reporting on things like the GameStop Saga or even Bitcoin.
Investing can also seem like something that might take considerable time and effort. You probably don’t want to waste valuable time stressing about the stock market. These feelings might make you dismiss investing before you even know the reasons why you should consider it. It can also be a worrisome process for a new investor who feels like they might lose money in the stock market. It can constantly feel like the market is on the precipice of a crash when we live in the volatile times of Covid-19 and Brexit.
Disclaimer: This article should not be considered as financial advice. You are responsible for your own financial research and decisions.When investing capital is at risk.
Andrew/ Mr Money Side Up
Should I Invest In Stocks?
When people get to the stage when they need to grow their wealth, they ask “where should I put my money”. Oftentimes people will say “I know I should invest in stocks but I don’t know where to invest”.
A default option for many in their 20s or 30s is to focus entirely on getting onto the property ladder. As a result, they miss the growth opportunities and passive income that comes with investing. Therefore if you are someone asking “should I invest in stocks”, then I want to give you a breakdown of the simple reasons why you should.
A Note On The Risks Of Investing
Many people who have asked this question to friends and family will probably have been told about the risks of investing. They will have been told about someone they know about losing their life savings in the stock market.
You’ll probably have been told about someone who lost thousands betting on the wrong company, or when the stock market crashed. However, this is mostly just noise and a result of irresponsible investing strategies and this is why I have some 10 rules for investing. To balance out this misinformation equation, I want to give you 5 reasons why you should at least consider investing in the stock market.
Reason #1 Investing In The Stock Market Is Simple
I used to think investing was intimidating and scary when in reality it’s extremely simple. My investing strategy is pretty much like watching paint dry. The most important skills required for investing is actually patience and stoicism. One of the biggest myths is that you need to know the next hot stock or get in on the latest IPO frenzy.
All you actually need to do is set up an automated system of investing in a collection of index funds and stick to your plan for the long term. You just set up an automatic monthly contribution from your current account to your investment account.
Taking these actions will set you up for building your passive income streams. In a couple of decades, you’ll wake up to hundreds of thousands of pounds or dollars.
A Note On Stock Market Volatility
This method makes it easy because you don’t really even notice that you are missing the money. It will also help you to avoid noticing the volatility of the money you invest.
Volatility can be scary and many people who do not understand the fundamentals of the stock market usually attempt to constantly buy and sell. This usually results in them buying high and selling low and as a result, they lose money.
In reality, you can just buy and hold a subsection of the economy. In the short-term the stock market is a voting machine, in the long-term, it’s a weighing machine. This ultimately means, the longer you wait, the better your potential returns will be.
Reason #2 It’s A Powerful Way To Build Wealth
On average, stocks have given an annualized return of around 10%. As a result of this, you can apply the rule of 72, which is a useful formula that is popularly used to estimate the number of years required to double the invested money at a given annual rate of return.
Years To Double Investment = 72 / Interest Rate
Given this annualized return of 10%, we can assume that your money will double every 7.2 years. At that rate, your money doubles every 7.2 years. Let’s say you start with £10,000. After a 40 year career, that turns into at least £320,000 from doubling 5 times.
Stocks are incredibly volatile, but this volatility is required to get these high potential returns. By trying to play it safe with cash and even bonds you will limit your long-term wealth. You can grow your wealth exponentially even if you are on a very average income. Just investing £100 or £200 a month can turn into hundreds of thousands of pounds given time. There is a very high probability you will get rich off stocks as long as you start investing early, keep investing, and never sell. Trying to time the market can be devastating and half your returns.
Reason #3 You Can Do It Yourself
Investing must have been extremely difficult when you had to make phone calls to set up accounts over the phone or go to the bank in person. The only information you will have on the stock market is the information given to you by someone wanting to sell you an expensive fund or inappropriate fund. We’re now in the golden age of online investing and this makes a simple DIY investment strategy incredibly simple.
Online investing makes it easy to start investing and this gives you a wealth of options. What’s even better is that the best services often have the lowest fees, making it easy, simple and low-cost. I remember when I first asked myself “should I invest in stocks?”, it all seemed very complicated because of the high number of funds out there.
Whenever someones ask me to recommend a fund, I always simply the conversation to be around building a low-cost but diverse portfolio. The search can be quite significantly narrowed down when searching only for low-cost, passively managed index funds.
Reason #4 It’s The Best Way To Bring Forward Your Retirement
The average person in the UK needs £169,175 to live on a comfortable income of £25,000 a year in retirement. If your retirement plan is based on using a savings account with a rate of 1% you are going to be in trouble. As you would need to save significantly more without the compounded returns of the stock market.
However, by investing in the stock market you can ensure you retire comfortably, or even decades before the traditional retirement age. You can use my financial freedom calculator to find out how much you would need to invest each month to retire comfortably.
Reason #5 It’s Incredibly Tax Efficient
There are three incredibly tax-efficient ways to invest and this allows you to maximise your returns.
#1 Salary sacrifice in your workplace pension
You can enrol in a workplace pension and pay a percentage of your salary into an investment fund. The employer is also legally bound to match your contribution by a minimum of 3%. So that’s also extra money in your pay-check.
This is usually done prior to you paying tax and national insurance, so it’s more tax efficient. As a result, your pension contribution is based on your gross and not net salary. This helps you to maximise the amount you can save from your income.
#2 SIPP
This is similar to the above but the government will add an extra 20% to your contribution. However, you will have to manage the fund selection etc., yourself. Rather than get tax relief prior to saving and investing, you get it added on.
#3 Stocks And Shares ISA (my personal favourite)
You choose an investment fund and you can use an ISA wrapper to avoid paying any tax on what you invest, earn or withdraw from the fund. You will not pay any capital gains tax. You can access this at any age you like, allowing you to essentially retire at any age. Having complete control over this money and not having to reach a minimum age is why it’s my personal favourite.
Start Building Wealth Today
Overall, you have every reason to start investing in the stock market today. You can get your accounts set up in just a few hours, and be well on your way to building wealth for a lifetime. Learn more about the basics of investing. By doing this you remove a huge financial barrier to wealth.
If you are asking “should I invest in stocks”, then the best time is now. The best time to do it was yesterday, the second-best time is today. The idea of trying to time the market is a myth and trying to do so can cost you half of your returns. After years of investing in the stocks, I’ve got used to the behaviour of auto-investing and forgetting the rest.
Remember, if you want to be inspired by financial freedom, then use my financial freedom calculator to see how it’s possible to retire early.
Trackbacks/Pingbacks