One common investing error is to invest in past winners after they have already risen a lot. With an investing story widely known, valuations can be high. And such over-valuation can drag on investment returns going forward because there’s a tendency for valuations to ‘normalise’, which can hold an asset back.
That works for stocks and shares and it also works for real estate. And property prices today are more expensive compared to the average wage than they have been in the past. This situation could hold back property prices in the years ahead, and an investment in buy-to-let property taken out now may not be as successful as it might have been in the past. For example, 20-odd years ago, property was much more affordable.
On top of that, tax changes and new rules about what landlords can charge tenants in fees are all coming together to make the property sector look far less attractive to me now than it was before. But I think shares are looking more attractive than ever. For example, the yields on the major indices such as the FTSE 100 and the FTSE 250 are higher than they’ve been for a while.
Indeed, I reckon there’s a good case for simply putting your money — £25k if you have it – into passive, low-cost index tracker funds, which means you’ll be investing in ‘the market’.
Selecting the ‘accumulation’ version of a tracker fund, rather than the ‘income’ version, will ensure that your dividends are automatically reinvested along the way. And that’s key to compounding your money.
The process of compounding will turbo-charge your investment over time, and another key ingredient of compounding is time itself. The longer you leave your investment, the more the returns are likely to accelerate.
If you run the numbers on compounding for any particular annual percentage of return, you may be astonished at the absolute levels of returns you are likely to receive in the later years of your compounding journey. But you can speed the whole process up by seeking even higher annual returns, and for many, that leads to picking individual shares rather than investing in indices.
The astonishing power of compounding
With an expected annualised total return in the mid-to-high single-digits, share indices aren’t bad – they knock the spots off cash-savings accounts, for example. But individual shares can do much better, and they could be your route to turning £25k into a cool £1m. Investors/traders such as US-based Mark Minervini have invested their way to several millions starting from similar levels as £25k, for example. And Minervini did it within the past 35 years, so it’s recent history, suggesting he experienced similar stock market conditions as we have today. I’d stay tuned in to The Motley Fool to find out more about how to go about investing in individual shares.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019