“The share market is effectively the transfer of wealth from the impatient to the patient.” – Warren Buffett
What would he know about investing, right? He is just one of the most successful investors of all time! Just maybe he is onto something though.
The fact is that most investors significantly underperform the market because of impatience. Warren also believes most of us would be much better off investing in a broadly diversified low-cost index fund/ETF.
If I applied this strategy and invested $100,000 in January 1980 into the Australian Share Market Index and left it there, reinvesting my dividends until December 2023, my annualised return would have been 10.32%.
My capital could have grown to just over $9 million!
Staying invested in equity markets can offer several benefits, including:
- Long-Term Growth: Equities historically provide higher returns over the long term compared to other asset classes like bonds or cash. By staying invested, you can benefit from the compounding growth of your investments.
- Compounding Returns: Reinvesting dividends and capital gains can significantly enhance the growth of your investment over time. Compounding allows your investment to generate earnings, which are then reinvested to generate their own earnings.
- Inflation Hedge: Equities tend to outperform inflation over the long term, preserving and increasing the purchasing power of your money. Companies can raise prices and grow earnings, which can translate into higher stock prices.
- Dividends: Many companies pay dividends, which provide a steady income stream and can be reinvested to buy more shares. This reinvestment can enhance the growth potential of your portfolio.
- Diversification: Equities offer a way to diversify your investment portfolio across different sectors and industries. This diversification can help spread risk and reduce the impact of poor performance in any one sector or company.
- Economic Participation: Investing in equities allows you to participate in the growth of the economy. As companies innovate, expand, and become more profitable, shareholders benefit from the appreciation in stock prices.
- Market Timing Risks: Attempting to time the market can be challenging and often leads to missing out on the best-performing days. By staying invested, you avoid the pitfalls of market timing and ensure you capture the market’s long-term gains.
- Capital Gains: Equities offer the potential for capital gains, which occur when the value of a stock increases from the purchase price. Over time, these gains can be substantial, especially for high-growth companies.
- Behavioural Benefits: Staying invested helps mitigate the effects of emotional decision-making. Selling during market downturns can lock in losses, while staying invested encourages a disciplined, long-term investment approach.
- Liquidity: Equities are generally more liquid than other investments like real estate or private equity. This liquidity allows investors to buy and sell shares relatively easily, providing flexibility and access to cash when needed.
These benefits underscore the importance of a long-term perspective and a diversified approach to investing in equities.
Stephen Lowry (CFP® Professional, DFP) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Performance data shown represents past performance or simulated performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.
Note: This material is provided for GENERAL INFORMATION ONLY. It has not been taken into account your personal objectives, situation or needs. The information is objectively ascertainable and is not intended to imply any recommendation or opinion about a financial product. This does not constitute financial product advice under the Corporations Act 2001 (Cth). It is recommended that you obtain financial product advice before making any decision on a financial product such as a decision to purchase or invest in a financial product. Please contact us if you would like to obtain financial product advice.