The share market has been generating good returns for investors for a very long time.
It has created compound annual returns of 10% per annum over the long-term despite all the wars, economic problems and changes in government. It takes less than eight years to double your money at 10% per year.
However, many people don’t end up actually achieving those returns for a variety of reasons. Fees are one of the biggest detractors to people’s long-term performance.
Many people don’t feel confident or capable of investing in shares themselves, so they invest with a high-cost manager that usually doesn’t end up beating the market. A few managers are probably worth their fees – you want the highest returns after fees. But many don’t outperform.
For most people in Australia and around the world it would be better to invest in a low-cost index fund. Warren Buffett suggests that the average (American?) person should just invest in the S&P 500, or iShares S&P 500 ETF (ASX: IVV) on the ASX, and worry about other things.
There are many spruikers out there offering complicated products like trading and watching charts. People want to believe there is a secret way to beat the market. There isn’t. Being patient with a good portfolio of shares is the most important thing.
The best thing we have on our side is time – whether that’s investing in individual businesses or quality index funds like the S&P 500 or Vanguard MSCI Index International Shares ETF (ASX: VGS).
Compound interest is a very powerful force. If you know how to use it then it can work for you, otherwise it will be working against you.
Keeping things simple means I don’t have to worry as much about my portfolio. If I invest in something with excessive fees or excessive risk it will probably come back to bite me at some point, so I’d rather just avoid the risky things from the start.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.