Shares are the way that a lot of people are saving for retirement through their superannuation, or perhaps outside of their super as well. I think shares are the best and easiest way to become wealthy over time and generate passive cashflow.
Over the decades the Australian share market has returned an average of 10% a year from a mixture of dividends and capital growth. That doesn’t mean shares return the same 10% year after year, one year the return could be 15% and the next year it could be 5%.
There have been some terrible years for shares like during the GFC, but there have also been some very strong years like the years immediately after the GFC as well as this year (so far).
One of the ways to copy the average returns of the ASX, the Vanguard Australian Shares Index ETF (ASX: VAS) (which is invested in 300 of the largest businesses on the ASX), has returned around 22% in 2019 thanks to a number of helpful factors including the lowering of interest rates by the Reserve Bank of Australia (RBA).
Vanguard has a useful chart that you can play around with using different dates showing the returns of various assets since January 1970, or whatever period you want to see. You can also add comparison points of who was leader in the US, UK or Australia.
US shares have been particularly strong over the past decade according to Vanguard’s stats, returning an average of 16.4% per year.
It might be hard to immediately see how much wealth those types of returns can produce. If you had invested $10,000 a decade ago into US shares, with an investment like iShares S&P 500 ETF (ASX: IVV), it would have grown to around $42,500 to the end of October 2019.
Not every 10-year period will be as strong as that. Occasionally there will be some market volatility and roughly every decade there will be a recession. But shares are at today’s (almost) record highs despite all the wars, politicians, recessions and memes that have happened over the past century.
The best way to invest is to choose long-term investments that you’re happy to hold even through some bumpy patches.
Moneysmart has a great compound interest calculator you can play around with to see how much your money can grow. One example – if you start with $0 and invest $5,000 a year into shares which return the long-term average of 10% a year (including the recessions) you would have $286,000 after 20 years.
Investment firm Fidelity has previously done a study of investors looking at who performed the best over a long period of time.
They analysed three groups of investors. The best performing investors were those who had died. Why? Because the more people chop and change their investments, the more they trade, the more frequently they sell because of fear, it resulted in more costs, more capital gains taxes and ultimately missing out on the gains.
For the record, the next best group were, on average, females because they traded less and went for less speculative ideas. Fidelity’s study showed men performed worst on average. Maybe Aussie blokes could do better than US males?
Shares are also a lot more passive than other investments like property. There aren’t any meetings with property managers. No repairs to stress about. No tenants to deal with – what happens if they don’t pay rent for a few months?
In the second part of my ‘why shares are so great’ articles, I’ll cover dividends.
Shares have proven to be great at producing returns over the long-term, as long as you pick something decent. There are some bad businesses out there too!
We hear it over and over from investors, "I wish I had bought Altium or Afterpay when they were first recommended by The Motley Fool. I'd be sitting on a gold mine!" And it's true.
And while Altium and Afterpay have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $5 a share!
*Extreme Opportunities returns as of June 5th 2020
Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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.