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The stock market can provide ordinary individuals with the kind of opportunities they can’t get anywhere else. Over the long term, returns from equities have eclipsed cash and bonds.
The ability to stay the course even when it looks like things are going wrong is non-negotiable. But for those who can do this, the stock market is worth checking out.
Returns
Over the last 20 years, the UK’s FTSE 100 has generated an average annual return for investors of around 6.5%. And the S&P 500 – the US index – has returned around 9.8% a year.
Exactly what someone might have made by keeping money in cash during that time is hard to say precisely. But the best guess I can find puts it at around 3% a year.
The difference between these numbers is huge. Someone who saves £1,000 a month at 3% for 20 years ends up with an investment worth £328,684.
That’s a lot – but the same amount invested at 6.5% eventually turns into £483,307 – and at 9.8%, it results in £708,548. And that’s an awful lot more.
Ups and downs
There is, though, a catch. The stock market doesn’t always go up by the same amount each year – in fact, there are some years when it doesn’t go up at all.
Share prices can fall sharply (by as much as 20% or even more) and nobody knows exactly when this is going to happen. That’s why the ability to take a long-term view is essential.
Selling after a big decline turns what could be a good investment into a guaranteed bad one. And anyone who might be in this situation should probably not invest in the first place.
For those that can stay the course, though, the stocks have been a great source of long-term returns. And there are reasons for thinking this will be continue to be the case in future.
Investing
Buying shares works as an investment because businesses turn cash into things they can sell for more cash. And Apple (NASDAQ:AAPL) has been a great example over the last 20 years.
The firm’s ability to make products and sell them for more than it costs to produce them has been outstanding. Add on to this the ability to pay for services and the returns get even higher.
Apple began the year with around $55bn in tangible assets like equipment and inventory. And it’s managed to turn that into around $133bn in operating income over the last 12 months.
That’s a 241% return from the business. I don’t know many other companies that can do this and I definitely can’t think of many other assets that can achieve anything similar.
Risks and rewards
Apple is an outstanding business. But every stock comes with risks and in this case, there’s a constant threat of regulation and antitrust legislation disrupting the firm.
That’s why investors shouldn’t put all their eggs in one basket. But the stock market gives people the opportunity to invest in a range of quality companies.
Those that have done this have found a 9.8% return has been achievable. That’s no guarantee about the future, but I don’t see why investors shouldn’t aim for this going forward.
