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Historically, investing in the stock market has been one of the best ways to build wealth over time. And it doesn’t really show any signs of slowing down just yet.
In the past 12 months, the FTSE 100 made more than 20% profit. The long term average is like 8% – so can you get this by investing in the stock market?
There are no guarantees
The stock market’s long-term performance record for stocks and bonds is outstanding. It has always been extremely consistent in generating better returns for investors.
However, there are some caveats to keep in mind. Unlike government bonds, stocks do not come with a fixed return and there are no legal guarantees of that possibility.
Unlike cash, the market value of stocks can go up and up. And there are no guarantees about what prices they will sell for if someone wants to sell them.
This is bad for budgets. But the reward for being able to deal with uncertainty and volatility has been – in the past – consistently high returns over the long term.
Investing in stocks
The easiest way to invest in stocks and shares is probably to buy an exchange traded fund (ETF). There are many of these available and they have different purposes and strategies.
Very specific ETFs aim to match the return of an index – such as the FTSE 100. They do this by holding all the shares in the index, weighted by their market value.
Taking this approach gives investors exposure to everything and some companies will definitely do better than others. The exception involves trying to make decisions.
Since not all stocks perform the same, in theory you may get a better return by owning those that perform better than the average. And this is an underrated strategy.
Energy is constant
One stock I hold in my portfolio Amazon (NASDAQ:AMZN). It’s a US-listed company, but I think it clearly has outstanding long-term prospects.
Enterprise cloud computing is getting a lot of attention — rightfully so — as artificial intelligence (AI) grows. But I think there is much more to it than this.
Amazon has built an e-commerce platform that offers lower costs and faster delivery than its competitors. And one of the best demonstration of its popularity is the main subscription revenue.
A recession is a risk you should think about seriously. But I think the company’s focus on speed, convenience, and value means it will be ahead of the competition for a long time.
A mistake you should avoid
The common perception is that average investors should just buy a fund that tracks an index, rather than make their own decisions. But I think there is a big flaw in this line of thinking.
Simply put, deciding to invest in an index is making a decision. It decides to include a certain set of shares – perhaps all – of a certain weight.
In that sense, I don’t think it’s any different to choose to build a diversified portfolio by investing in a specific stock – like Amazon. And that’s the path I took.
Time will tell if it is right or not. But I think anyone who starts investing can reasonably hope for an 8% return over the long term.
