I’ve been fortunate in my life to have met some great minds, people far smarter than I am, who showed me how to get ahead financially.
I’m very grateful for this and I think that’s why I wrote The Money Plan, to share some of the secrets they taught me in order to help as many people as possible.
This week I read a great blog by one of the people that helped me as he celebrated 40 years in business.
David Booth is the founder of Dimensional Fund Advisers and a genius in the investment world, so I wanted to share his thoughts and mine so you too can benefit from his wisdom.
Gambling is not investing
This is such an important message to take on board.
Gambling is a short-term bet, if you treat the stock market and investing like a casino, picking your favourite share and trying to ‘buy low, sell high’ then you may very well end up sorry.
If you bet on the stock market in this way, you need to be right twice: when you buy and when you sell.
Investing on the other hand is a long-term game; you buy, sit tight and go off to enjoy your life. The sooner you start, the luckier you could become.
The stock market does not go up in a straight line, which of course is what worries people about investing.
But as investors we are rewarded for the risk we take in the stock market.
Over the last 100 years the world stock market has returned around 10% on average per year, but hardly ever is it close to 10% in any given year. Some years it’s far higher, and others it’s negative.
We can’t make this uncertainty disappear so we should embrace it, by buying into the world stock market and holding on for decades.
Tune out the noise
If an investment sounds too good to be true, it probably is. Fads come and go, but the world stock market is still here.
Television experts offering tips, my neighbour’s next sure thing: these are entertainment, not investments, and it’s important to train yourself to think that way.
The truth is you can do very well without having to have any insider secrets, being in the know, or first in line.
While sometimes the world stock market is unpredictable and may seem chaotic at times, there is a form of order which rewards the long-term buyer.
What should I do?
I’m often asked, ‘If what you say is true, why do so many people try to beat the market, why not just accept the market return and leave it?’
Because we all want to think we are better than that, that we can beat the market, just like we think we’re a better than average driver, lover or employee.
You would do very well by buying a world index fund and leaving it alone for as many years (not months) as you can. Your future self will thank you for it.
Five things you need to know about investing for the long term
- Investing £100 each month at 10% pa return produces a fund of £207,929 after 30 years.
- Saving £100 per month into a bank account with 1% interest would produce a fund of just £41,968 after 30 years.
- Increasing your monthly savings by just 3% can make a big difference on your final proceeds. Time is your best friend when investing, as returns exponentially grow.
- Most people don’t see themselves as investors, even though most of us have investments in pensions.
- A significant risk to your money is inflation: since 2000, inflation has almost halved the value of cash and inflation is currently at 7%.