The Growth of Wealth

What gives the best growth of your wealth and does 'time in the market' really matter?

This graphic shows what’s been going on ‘underneath the hood’ of the stock market since 1925 to the end of 2020 so it now includes the impact of Covid-19.?

Let’s start at the bottom of the graphic……

1. UK Bull and Bear Markets – A bull market in simplistic terms is when the markets are growing and this can be seen by the turquoise sections. A bear market is a retracting market which is shown by the dark blue. You can clearly see that there are long periods of growth then short periods of retraction over the 96 year period. This emphasises the point of spending time in the market and that over the long term the markets grow.
2. The blue and red chart shows the growth of ￡1 over that same time in the UK with the different Prime Ministers that we have had in power during that time as well as other important events.?
3. The coloured line chart is probably the most interesting and relevant part of the chart as this shows ￡1,000 in 1925 and the value that would have been at the end of 2020 if it had been invested in different assets, so let’s break that down:

• In inflationary terms, if someone had earned ￡1,000pa in 1925 they would have to be earning ￡34,000pa now just to keep pace with the cost of living. Inflation has averaged 4% a year during that time.?
• If you had put the money in the bank it would now be worth ￡85.5k however that’s an average interest rate over 96 years of 5%, can you remember the last time we had an interest rate that high??
• So if inflation is higher than your savings rate, you are losing money because your money won’t buy as much as it did yesterday. You need to be beating inflation as a minimum.

Now for asset backed options, what would ￡1,000 have been turned into and what is the measure of volatility (a measure of risk due to the movement of price) associated with that investment?

• Global Bonds (classed as safer assets than shares) would have turned ￡1,000 into ￡240.6K with a risk measure of 11%pa. That’s an average return of 6%pa.?
• Gold would have turned ￡1,000 into ￡310.2K?BUT?has a risk measure of 20%pa!!!!! That’s an average return of 8%. Not sure it’s worth the risk if you see how much it bounces around on the chart.
• UK property, if you’d have bought a house for ￡1,000 in 1925, it would now be worth an average of ￡467.9k. A return of 7% with a volatility measure of 10%. Interesting.?
• And now into stocks and shares based portfolios, if you had invested your ￡1,000 into anything between a Balanced Portfolio up to Emerging markets, you would have had a portfolio of?between ￡2.3MILLION and ￡14.1MILLION from that same ￡1,000.

I know which one I would prefer.

Now some caveats and thoughts around this:

1. Maybe we don’t have a 96 year period, but you may have a 30-60 year period, pick which 30-60 years on the chart you want, it won’t really matter the differentials will be the same. Also, if your assets outlive you, then someone in your family might have a 96 period, why not grow your assets so much that they outlive you and support your beneficiaries?
2. This assumes you have put the money in and not panicked and taken it out, history shows that you can miss out on c.60% of returns by messing about with your portfolios or putting money in cash when you should have waited out the volatility (that’s where we come in to hold your hand in times of panic).?
3. After every retraction, the market sets off again for another long period of growth, we may be starting this phase now, are you invested in it to capture that upside?
4. Property may have a place in a portfolio but over the long term it has been outperformed by global equities. Many people wouldn’t think that without seeing it.?
5. Are you holding too much money in cash? If you have your short term income needs, capital expenditure and emergency fund in cash, think about the rest of your funds and whether more should be invested.?
6. If you are withdrawing funds, use cash as much as possible first to allow the portfolio to grow.?
7. Pay in as much as you can, do you have capacity for an extra ￡100pm, or to start a stocks and shares ISA if you only have a pension with us or visa versa?
8. Be careful of being in the wrong assets, taxation can have an impact on your returns.?
9. What is risk? Yes the markets will bounce around but is that the bigger risk when we have 96 years of data to back it up, or is keeping too much money in cash and running out of money in retirement a bigger risk? Don’t leave yourself open to choosing between heating and eating.?
10. Remember, investing is like walking upstairs with a yoyo, there will always be highs and low but the general direction is up.?

If you would like to discuss your individual circumstances in more detail, please do contact the office on 01942 889883 or [email protected] to arrange an initial chat or Financial Discovery meeting with one of my team.

They would love to help you with your Financial Planning.

Sarah Hogan, Company Director and Chartered Financial Planner.

The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.