For many people, the phrase “investing in the share market” is framed by either gains and losses. For the “gains” group, the thought of increasing their wealth and having the potential to generate returns is what propels them to invest. For the “losses” group, the thought of losing money is what keeps them out of the market and from investing their hard-earned monies into what they might perceive as a risky endeavour.
But while past performance is not an indication of future performance, research shows that $10,000 left in the bank since 1991 would grow to $40,000 at an approximate rate of 4.6 per cent annuallyi.
On the other hand however, the same $10,000 invested in either U.S. Shares or Australian Shares would result in almost $220,000 or $160,000 respectively, significantly more than the bank option.
While these figures are impressive, the numbers to focus on here are the $40,000 in the bank and its average growth rate of 4.6 per cent per annum (based on the Reserve Bank of Australia’s official cash rate).
Australia has been relatively lucky over the last 30 years, with the rate of inflation only passing 4 per cent approximately four times in the last 30 years. Five, if you include 2022’s numbers. Which means for the most part, the $10,000 saved in the bank has largely kept pace with inflation, but just barely. And as we’ve observed in the last few years, even this can turn on a dime, quickly.
If inflation continues to grow, and savings interest rates in the bank continue to stagnate, your savings will lose value over the longer term, even with interest earned. One could argue that the cost of not investing is greater than that of investing prudently over the long term.
The cost of cashing out
The other cost that often has a permanent impact on an investment portfolio is the cost of cashing out without a plan, particularly when there’s heightened market uncertainty.
For many investors, even those with many years of experience, having the nerve to stay invested during periods of volatility does not come naturally. It’s difficult to not be swayed one way or another amidst sensationalist news headlines or when the balance of your investment portfolio fluctuates day to day.
In times like these, it may greatly benefit investors if they allow themselves to acknowledge their worry and concerns, but resolve to not act on such emotions and cash out (unless it’s part of the original plan).
When markets are particularly noisy, remind yourself of your long-term investment goals and check that they are still aligned with your asset allocation.
Recent research found that during the 2020 COVID market sell-off, 80 per cent of investors who moved to cash would have been better off if they had stayed invested in equities. So rather than feel like you cannot stomach temporary losses, think about whether your investment portfolio has long-term appetite and the potential to deliver you returns if you stay the course.
Ultimately, decisions around whether to invest, keep investing or cash out are personal and should be made with consideration to your individual risk tolerance. But as the research shows, a long-term investment strategy coupled with discipline and perspective is the key to building long-term wealth, and there is an evident cost of not investing.
Source: Vanguard May 2022
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Reproduced with permission of Vanguard Investments Australia Ltd
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