Why you might be missing out on becoming rich

Sick of those low returns in term deposits? There is a better way

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Share ownership in Australia is falling, with many investors missing out on the gains the stockmarket has made over the past few years.

According to the last ASX shareownership report from 2012, 38% of the adult population invested in the sharemarket, with only 34%, or 6 million people investing directly in shares.

Ownership has been falling, from 43% in 2010 to 38% in 2012. Since the beginning of 2012, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is up 31.5%, not including dividends – meaning those investors who jumped out in 2012 have missed out big time. For those investing for the long-term, those ‘easy’ gains are gone.

And perhaps there’s at least one factor of our psychology behind the falling participation levels. Loss aversion means investors are more motivated by avoiding a loss than seeking a gain. It also means losing $100 hurts more than the satisfaction we’d get from gaining $100. No doubt many investors were also burnt by market falls during the GFC.

For those investors sitting on large sums of cash in term deposits earning ‘real’ interest rates close to zero, yes, you are unlikely to lose your capital, but you are also unlikely to ever generate substantial wealth. It’s a bit like life, if you’ll allow me the analogy. You are unlikely to meet the love of your life, new friends, travel and see the world, experience new ideas and activities while you are locked up nice and safe inside your house.

Investing in shares gives you the benefits of potential capital gains, as well as franking credits, two factors term deposits will never give you. Add in the fact that over long periods of time, the stockmarket offers you the highest returns of any asset class, despite events like the GFC, 9/11, stockmarket crashes, Europe debt issues, Greece collapsing, war in Iraq or Ukraine geopolitical issues.

Ok, I admit that investing in the sharemarket carries a higher degree of risk, but investing regularly into listed investment companies (LICs) like Australian Foundation Investment Co.Ltd. (ASX: AFI), Argo Investments Limited (ASX: ARG) or Milton Corporation Limited (ASX: MLT) would be a great first step, giving you diversified exposure to the Australian stock market. What’s more, all three offer decent fully franked dividends of around 3.5% and lower management fees than most fund managers.

Are you ready to dip your toe in the water and take your first step on the path to potential riches?

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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