When you’re no longer in gainful employment, you need to know how much money you’ll have to live on from your savings and pension pot. You’ll be wondering where to put your money to generate the greatest return. And you’ll almost certainly be conscious of the risk level you’re willing to take.
- You might be tempted to stash your money under the mattress. But you know that its value will decrease every day.
- You might stick your savings in a standard bank account in the hope of earning a little bit of interest. But you know inflation will wipe out any gains (and, anyway, there’s no such thing as a risk-free bank anymore).
That means the best place to invest is in the markets.
See these graphs by Professor Elroy Dimson – he’s like a god in the world of evidence-based investing.
In the year 2000 (not so very long ago), we could all be confident we’d earn interest that exceeded inflation. When the interest rate was 7% and inflation was 3%, we’d get a real return of 4%. There was zero risk and we’d still get a return. Meanwhile, if we were willing to risk investing in equities, we’d get an even higher return – that’s called the equity risk premium.
Today, with interest rates lower than a snake’s belly, you will see the bottom section of the graph has disappeared. If you take zero risk, you’ll get zero return, or even lose money. For example, even NS&I offers 1.15% return – but the Bank of England’s inflation target stands at 2 or 3%, which means investors are losing money. Going backwards.
So, what’s happening in the markets at the moment? Here’s your quarterly review.
As you can see from this graph, world markets went UP in the first quarter of this year.
Look at all these lovely green arrows! Up, up, up, up, up. So, if you stayed in the markets when things were dipping down (as we advised at the time), you’ll be laughing now.
To put this into a long-term context, you can see that we’re not yet back at the recent peak, but overall the trend is ALWAYS upwards if you wait long enough.
What this means to you
- We’ve said it before and we’ll say it again. Don’t be distracted by daily headlines. Just wait it out and it will be OK
- Understand the long-term drivers of return (low fees, for example)
- Diversify broadly to reduce the risk