Investing is not for everyone! Sometimes we actively discourage people from investing, it might seem a bit strange for us to say this but you should only invest when its right for you. Here are the three main reasons why you shouldn't invest ...
• you have debts (apart from your mortgage);
• you need all your savings for a specific purpose; and
• you are not prepared to invest for more than five years.
You have debt
If you have debts other than you mortgage you should not invest until this is cleared. Many credit cards charge 15% interest or more. True, some people pay only 0% rates on their cards as a result of balance transfer deals, but these deals are often only for the short term. These 0% deals are a great idea if you use them to reduce your debt. But a credit card balance is still a short-term debt, whatever the rate.. The chances that you will do better than a 15% return as a novice investor are between slim and none.
To put the figures into some perspective, Warren Buffett -- arguably the world's greatest investor -- has managed an average annual return of around 22% over the last forty years
So, pay off all your debts first.
There is arguably one thing worse than investing in shares while still in debt, and that's putting yourself in more debt specifically in order to buy shares. This is just about the most Foolish thing you can do, as the value of your shares could easily drop. Your investing decisions would then be governed by your debts and the wishes of your creditors. That way disaster lies!
However, there is no reason why you should not learn about investing in shares before you get out of debt. The extra practice could come in very handy.
Using your savings
It is often said you should only invest money you can afford to lose. Perhaps a more constructive way to consider this is: "if I lost this money, how much would it affect my day-to-day life or expenditure?". You also need to have some money for the proverbial 'rainy day'. A sensible rule of thumb is to set aside enough money in a high-interest savings account for six months' expenditure. But you may feel happier setting aside more money if, for example, you have a number of dependants, although you should probably be looking at some sort of income protection insurance for such situations.
If you need all your money for a specific purpose, like a deposit on a house or a tax bill, it makes more sense to stick your money in a high-interest savings account then buying into an investment.
Timeframes
For periods of just one year, the stock market has historically only beaten cash 60% of the time. Not great odds. Not much better than a coin toss, in fact.
However, historically, the long-term rate of return from the stock market has been significantly greater than that which is generated from cash saved in a bank or building society. But it has also been more volatile.
Over longer periods the chances of shares beating cash are much higher. Five years is often used as the benchmark for the minimum period you should consider investing in. Over this length of time, the stock market has historically beaten the returns from cash 80% of the time. Invest for as long as twenty years, and history shows that shares have won 98% of the time. Now that's more like it. So, the longer you are prepared to invest for, the better.
Beating The Market?
If you want to try your hand at stock or fund picking, then you'll have only one aim in mind - to beat the stock market.
But let's get something straight right from the start...
80% of all actively managed funds undershoot the stock market average over the long term. Given that most professional fund managers, with all their research, industry contacts and experience, can't consistently beat the stock market, how can you if you’re a novice?
Consistently beating the stock market over the long-term is very difficult.
You can contact me Daniel McGonigle, Managing Partner at Affinity Global Wealth on (+351) 91 279 2998.
Affinity Global Wealth
Av. Vilamoura XXI, Edifício Portal,
Bloco B -1B, 8125-406,
Quarteira, Portugal
T: +351 289 314 530
F: +351 289 314 520
E: info@affinityglobalwealth.com
