A popular US finance website just published a blog post about millennials and stock market investing. Their conclusion?
If you own shares for 40 years, you can't lose.
Using a model and historical data for the US S&P 500 stock index and US Treasury rates (a proxy for interest rates on savings accounts) as well as adjustments for inflation, the simulation found that there is a greater than 99% chance of share investors at least maintaining their initial investment over time.
I.e., if you owned the S&P 500 index for 40 years, there is less than 1% chance you would end up with less money than you started with (according to their model). Based on a certain rate of contribution, there is also a 95% chance you'll approximately triple your money, and a 75% chance that you'll make 6 times your money.
Could this be applied to ASX investors?
Perhaps. One of the biggest takeaways from this study – other than 'past returns are not a predictor of future returns' – is that Australia is not the US. Australia's largest companies are banks like Commonwealth Bank of Australia (ASX: CBA) and miners like BHP Billiton Limited (ASX: BHP).
Then we have supermarkets like Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES), a Coke bottler, some insurers, telecom companies like Vocus Group Ltd (ASX: VOC), and child minder G8 Education Ltd (ASX: GEM).
Which of course is a pretty sharp contrast to the US S&P 500, filled with truly global ventures like IBM, Kellogg, Merck & Co, and so on. Actually, Australia's historical share market returns are pretty similar to the USA's over the past 30 years, so a simulation that extrapolated an ASX 200 investment out into the future could get comparable results.
However, I wouldn't like to buy only the ASX 200, partly because it is a) highly dependent on the Australian economy, b) heavily focused on resources, and c) our companies don't have a good track record of expanding internationally. However, I think that the general premise of investing in shares for the long term is a solid one. Companies are productive entities and even without growth, the dividends paid out of company profits can generate respectable outcomes over time.
For example, my parents followed Paul Clitheroe's advice and invested some money in managed funds tracking the ASX200 in the early 90s. Despite paying obscenely high fees of more than 2% per annum to a popular fund manager, who shall remain unnamed, they have still more than doubled their money just from the dividends alone (fees ate the capital growth). Importantly, that time period included a number of ups and downs in the stock market, including the GFC.
Foolish Takeaway
Over ultra-long time periods such as 30 years or more, there is no doubt that shares are the best tool for sustainably growing your wealth. Investing in an index or a managed fund is easier, because the challenge of company selection is taken out of your hands. Investing in individual companies is trickier, and that's where The Motley Fool comes in.
