If you are in your 20s, there are plenty of reasons to ignore the stock market. You might be saving for a house deposit, paying down debt, funding some training, or being asked to pay into a pension at work. You might be renting and finding it hard to save at all.
Or you might just be nervous — a study in the US last year found that 46% of millennials stay out of the stock market because it is 'too risky'.
But think about that for a moment. Historically, the stock market has been an engine which can drive your money harder than anywhere else, if you can only give it long enough to do so. You can add investment fuel as you go along, to suit yourself, and keep control of your savings. You can access cash if you really need to along the way, but if you can stay fully invested the engine will achieve top speed. At 25, you could press the starter button on a 30-year ride to added financial security in your 50's.
Young investors have the opportunity to save more for retirement
A 65-year-old man now expects to live to 84, but life expectancy is improving by around six years every two decades, so 20-somethings could easily live to 100.
Automatic enrolment into a company pension is not the key to prosperity. Even when total contributions rise to 8% of salary in April 2018, they are still less than half as generous as the old workplace pensions. They are also not properly portable when people change jobs, as 20-somethings are expected to do every few years.
And remember, there may not even be the £155-a-week state pension to look forward to by the time you retire. The government is constantly looking for ways to reduce its massive £7 trillion public pension liability, and raising the pension age will no doubt continue.
Why stocks and shares are a good investment for young adults
Past performance is no guide to the investment future. But history suggests that it is, at least in a big picture view. Holding shares over any 30-year time period since the beginning of the last century has delivered an annual return averaging 5.6% — and that’s after inflation.
If you want to ignore ancient history and look at markets since 1950, a £100 investment in shares had grown by 2016 to £10,749, compared with £5559 in a building society, and a Retail Price Index (RPI) value of £3134.
But that is not counting the dividends that shares produce. If those dividends had been reinvested over the 66-year period, the £100 becomes a turbo-charged £182,494. All these figures come from the annual Barclays Equity Gilt Study, which charts returns back to 1900.
Someone aged 25 in 1992, who took the plunge into shares in the depths of a recession and began putting £100 away each month, would have saved £30,000 by last year. Allowing it to grow with dividends reinvested over those 25 years would have produced, in the average investment trust, a handy fund of over £127,000 at the age of 50.
Investing in the stock market young has many benefits
This of course begs the question, ‘which shares?' Take the 30 years from ‘Black Monday’, the market crash in October 1987, which now barely registers as a blip. If you had decided to invest in the US, £1000 in the Dow Jones would by last year have been worth £12,287, while in Germany’s DAX it was £10,352 and in Hong Kong’s Hang Seng Index £9114.
In the FTSE 100, that same £1000 would have grown to a modest £3151, highlighting the benefits of looking beyond our own back yard for investments.
Looking beyond the biggest companies makes sense too. The FTSE 250 index, reflecting the performance of the medium-sized British businesses at the heart of the UK economy, was launched 25 years ago. Since then, it has delivered an annualised return of 11.6% a year – more than twice the firepower of the blue chip FTSE 100.
It is really all down to the magic of compounding — returns spawn their own returns — which means that time is the real growth engine for young investors.
If you start in your 20s, you don’t need to worry unduly about the inevitable ups and downs of the stock market. You can afford to ride out the market dips, however unsettling they may be at the time, because staying invested and capturing the upswings is the key to long-term performance. You can also afford to take apparently higher risks, by committing money to areas such as emerging markets.
Getting into the savings habit with a regular monthly investment into a plan or platform means you are drip-feeding money into the market. That reduces the risk of investing lump sums when the market is high, and gives the opportunity of buying investments at different levels, smoothing returns. This year, for instance, your £100 invested in February will probably have bought more of the same investment than it did in January. This is an effect known as pound-cost averaging.
Asset manager M&G says: ‘Trying to predict market activity over short time periods, often referred to as ‘market timing’, can be a risky strategy and investors can often miss some of the best days when gains can be made.
‘We believe that, ideally, investors should plan to invest for at least ten years. Over the long term, share prices tend to reflect the underlying reality of companies, and the returns they deliver to shareholders.’
M&G looked at how the FTSE All-Share Index and the FTSE World Index behaved from the start of each month over every one-year, five-year and ten-year period from 1994. In both the UK and US, investors lost money in 25% of the one-year periods, and in 20% of the five-year periods. But over the ten-year periods, they had a 98.3% chance of making money, with an average annual return of 5.3%.
M&G says: ‘The data would suggest that the longer investments are held, the lower the risk of losing money.’
The message for those in their 20s is clear. Invest as early as you can and stay invested, making sure you re-invest any dividends to turbocharge your returns. Don’t be nervous, and focus on the long term — if history repeats itself once again, your investments will grow and set you up for greater financial stability and flexibility at the points in your future when you most need it.