As the cost of living soars, it’s understandable that many people aren’t looking too hard into the future in order to focus on the present. Nevertheless, I think it’s vital to have at least one eye on the long road ahead. Today, I’ll explain why I’d prioritise buying stocks over accumulating money, even if I’m starting from scratch a little later in life.
Let me make something clear from the outset. I’m not suggesting that having at least some cash savings is a bad idea — quite the opposite. Regardless of how old I am (spoiler – I’m in my 40s), having a cushion to protect me from the unexpected would be my priority. Let’s be honest: few of us predicted the global pandemic in 2020, or that it would cause so much pain for so long. And based on research, an awful lot of people had no savings before inflation ran riot.
Beyond this cash buffer, however, I’d make buying stocks a priority. Here’s why.
While share prices zip here and there every day that markets are open, the pattern of returns over the long term has been more predictable. In short, stocks have nearly always delivered the best return of any asset class. So, they beat bonds, property, gold and yes, cash.
Things get even better when any dividends I receive are reinvested rather than spent. This allows for more compounding. That’s the not-so-secret sauce that could even turn ordinary folks into stock market millionaires.
Don’t ignore the risks
While the evidence that stocks outperform other asset classes in the long run is compelling, there are a few things I should keep in mind.
Perhaps the most important of these is that the stock market doesn’t owe me anything. In other words, I can’t assume the future will look like the past and I’ll get the same sort of returns. Even if I do, there could be a lot of volatility along the way. Oh, and those dividends just mentioned? They can’t be guaranteed either.
A lot depends on what I buy too. Right now, I’m prioritising growth over income stocks. However, this may change as I get older and I consider swapping the rat race for the beach.
This brings me to my final point.
No age barrier
I’ve used the age of 40 intentionally. With almost three whole decades to go before I can claim the State Pension, that still gives me a lot of time to accumulate a sizeable pot for retirement.
To be frank, I could have said pretty much any number. Although a person’s risk tolerance tends to decline with age, this is not to say that someone already in retirement can’t continue growing their wealth. In fact, any time horizon longer than five years or so is probably worth it.
Why five years? Well, that’s usually long enough to overcome any periods of market weakness. I sincerely doubt we’ll still be worrying about the performance of markets in 2022 by 2027.
That said, there’s a universal truth: the earlier a person can start, the better. If only I could turn back the clock and learn about the basics of investment in my teens.
That would have been the best time to start. The second best time is now.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.