It's completely normal to worry about stock market risk and investing in ASX shares if you're a beginner investor just starting out (or wanting to) on your investing journey. Entrusting your cash to the whims of the markets is no easy feat. It can be emotionally taxing, and require something of a leap of faith to relinquish some control over your own finances.
But you know what could be even riskier? Getting scared and just not investing. If risk is defined as the chance of losing money, then nothing is riskier than leaving all of your cash in the bank.
Let's talk about inflation for a minute. As we covered last month, the latest inflation statistics for the Australian economy had inflation running at 4.9% over the 12 months to July 2023.
This means that one Australian dollar would have bought you 4.9% fewer goods or services, on average, in July than it did a year before that.
Now you might think that having your cash in a savings account or term deposit would help arrest the corrosive effects of this inflation. But you'd only be half right, if that.
Savers are losers
Say you scoured the markets for a top savings account and found one offering an interest rate of 5.5%. That's 0.6% above inflation, so you're wealth is still slowly growing, right?
Well, not really. Sure, if you leave your money in this savings account, you are beating inflation by 0.6%. But here's the kicker. Any interest income from a savings account is taxable, meaning you have to pay full income tax on that interest. And that doesn't take inflation into account. So after you've paid your taxes, you're money is still probably going backwards in real terms.
That's why unless you've got far more cash than the average Aussie, the stock market is essential if you wish to build your wealth in real terms. Sure a 5.5% savings account is decent. But the rate of return investors have enjoyed from ASX shares far exceeds what a savings account can offer you.
Take a simple ASX shares index fund like the SPDR S&P/ASX 200 Fund (ASX: STW). This index fund invests in the 200 largest companies on the ASX. It is a perfect bottom-drawer investment that requires no stock-picking skills or investing prowess.
This index fund has returned an average of 10.63% per annum over the three years to 31 August. It has also averaged a return of 7.81% per annum since its inception in 2001. How's that for stock market risk?
That smashes any return you could have gotten from a cash-based investment over the same periods for one.
What stock market risk? Your bank account is robbing you blind
But also consider that unless you sell your investments here, those gains aren't taxable. You'd only have to pay tax on any dividends received. And even then, the franking credits that this ETF also pays out would reduce that as well.
Investors worth their salt might even be able to achieve higher returns than this ETF has.
But even if not, there's no disputing the fact that an investor who put their cash in the share market has done remarkably better over time than someone who has stayed away from shares because they are scared of losing money.
There are few guarantees in the investing world. But one you can take to the bank is that not investing will almost certainly cost you more than putting your money to work in quality ASX shares. Even if they are passive, bottom-drawer index funds.
