While the stellar recovery in share prices over the last few months has generated more interest in the stock market, I’d bet that many in the UK who could start building a decent nest egg will still refrain from doing so. Here are what I believe to be some of the most prevalent reasons for this and why these ‘myths’ are simply wrong.
1. “I’m not rich enough”
The idea that in order to make money from investing, a person already needs to be wealthy is completely false. These days, it’s possible for anyone to begin investing by opening a Stocks and Shares ISA and contributing as little as £25 a month.
Sure, that still requires sacrifice. However, automating savings in such a way that this amount is moved to the ISA on the same day a person gets paid takes the sting out of it. After a few months, it may not even register.
Of course, buying shares every month will still cost money in the form of commissions paid to brokers. Again, there’s a way of minimising the pain involved by taking advantage of that broker’s regular investing service. Here, shares are purchased on set days every month. Depending on the broker, this can actually reduce fees to zero!
2. “Investing is too hard”
Actually, investing doesn’t need to be difficult at all. Like most things, it depends on the way we approach it.
Yes, becoming a successful active investor who picks their own stocks can take effort and a willingness to do ongoing research. Regardless of the potential benefits to one’s net worth, that clearly won’t be everyone’s cup of tea.
Fortunately, there’s more than one way to make money from the stock market. One alternative is to buy a group of ‘active’ or ‘passive’ funds. This reduces risk by spreading money around more stocks and requires minimal maintenance on the part of the investor.
In fact, I’d go so far as to say that the hardest part of investing is behavioural. In other words, it’s about learning to manage one’s emotions, specifically greed and fear, and not allowing them to dictate financial decisions. As experienced market participants will know, doing as little as possible is often the best strategy.
3. “I’m too old to start”
To stand a better chance of becoming wealthy from the stock market, it certainly pays to begin as early in life as possible. This is because a longer time horizon allows someone to benefit more from the ‘magic’ that is compounding (earning interest on interest).
That said, there’s a good chance someone in middle age with no prior savings at all can still do well. Investing £25 per month for 30 years — a realistic time period for someone in their 40s — could see them accumulate a little over £28,000.
Although likely requiring more risk, this end result would be even higher if this person were able to achieve an annualised return above 7%. As someone in my 40s, this is something I’m trying to do myself. My personal strategy is to invest a good proportion of my money in small-cap companies. These have a better chance of growing at a faster clip than your typical FTSE 100 giant.
Put simply, age should not be considered a barrier to successful investing. Like most things, the key is to get started!
