Regularly saving money is a good habit to adopt, but is unlikely to bring retirement a large step closer. Cash returns have been poor for many years, and could remain so due to the prospect of continued low interest rates.
A better home for your excess capital could be the stock market. Investing even modest amounts regularly in a diverse range of stocks could allow you to capitalise on the growth potential offered by the stock market.
Since it is now easier and cheaper than ever to buy a range of stocks that offer diversity, today could be the right time to pivot from cash to stocks.
The availability of regular investing services means that buying stocks is no more time-consuming than holding cash. It is possible, for example, to set-up a regular monthly investment into a diverse range of companies in a matter of minutes, with many share dealing providers offering this service.
The benefit of investing regularly in the stock market is that your capital has a longer time period to be positively impacted by compounding. In other words, the track record of the stock market shows that it generally moves upwards over the long run. Therefore, owning stocks for a longer time period enables your portfolio to maximise its overall gains.
Since regular investing services are usually much cheaper than commission on standard trades, it could prove to be an efficient step for smaller investors to take when gradually pivoting from cash to stocks.
Of course, reducing risk when investing is highly important for all investors. Any stock can experience a disappointing period when it comes to returns, which may hurt an investor’s portfolio.
One means of reducing risk is to diversify across a large range of companies. This reduces the impact of one stock’s disappointing performance on the wider portfolio, and could mean that your returns are less volatile.
A tracker fund could be a sound means of obtaining exposure to the stock market, while achieving a significant amount of diversification. Their costs have fallen in recent years, which makes them increasingly accessible to a wide range of investors.
It is possible for any investor to outperform the stock market. This could lead to significantly higher returns in the long run – especially when compounding is factored in. As such, buying direct equities could be a sound move for investors who have sufficient capital to obtain a diverse portfolio through the purchase of a varied range of companies.
With the stock market having experienced a period of uncertainty in recent months, there may be a number of buying opportunities available to long-term investors. Seizing them now and benefitting from having a longer time period in the stock market could enhance your returns and lead to greater outperformance of cash holdings in the long run.
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The Motley Fool Australia has no position in any of the stocks mentioned. 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.