Does it scare you when you see headlines like A billion pounds knocked off the FTSE or Shares slide in FTSE rout? And what about when you look at a stock market chart and see something like the Himalayas, with gains and losses that look like pure gambling?
Its only natural if it does, and its the kind of thing that keeps many people away from investing in shares altogether, instead sticking to safer cash savings accounts that earn a measly 1% or 2% per year. And its understandable that you might feel more confident with a smooth stock market chart, edging gradually up every year, and with no sharp dips for your cash to fall into.
But if youre looking for a home for long-term savings money that you wont want to touch for a couple of decades or so then you could be making a very big mistake. Thats because over the long term, the ups and downs of the market actually help to boost your profits.
Regular investments
Lets suppose you have 100 a month to save and you think about putting it into a FTSE 100 tracker thats a low-cost fund that closely replicates the performance of the index. And lets imagine a year in which the FTSE ends the year at exactly the same level as it started. Which would make you feel better a smooth ride at the same level all year with no ups and downs, or violent 20% swings either way month by month?
Well, the smooth ride would leave you with exactly the same at the end of the year as you had invested (minus charges, which can be as low as 0.25% per year for a tracker fund).
But if you get hit with the extreme roller-coaster ride, on a month when the FTSE 100 is 20% up youll buy fewer shares with your 100, and on months when its down youll be able to buy more. Now, you might think Im going to tell you the two will even out and youll be no worse off, but its actually better than that.
An extra boost
Thanks to a thing called pound cost averaging, the extra shares you can buy on cheaper months actually slightly outweigh the shortfall on more expensive months, and by the end of the year you will have invested 1,200 but it will be worth 1,250! That might not sound much, but its an extra 4.2%, which alone is way better than youll get from cash savings.
Of course, the FTSE wont gyrate as wildly as that, but I chose such big swings to emphasize that you really should not be afraid of short term spikes and dips in the market. Over the long term they tend to even out anyway and investing in shares has soundly beaten cash savings for a century and more. But on top of that, my extreme example shows that short-term volatility actually adds a little boost to the profits made by regular investors.
Take the profits
So next time you hear someone sucking their teeth and shaking their head over a FTSE collapse headline, you shouldnt feel down in the dumps. No, if youre in it for the long term, you should be smiling and thinking to yourself Now I can buy shares in great companies even cheaper.
Making regular investments over decades can even be the key to earning a million from shares. But don’t just take my word for it, get yourself a copy of The Motley Fool’s 10 Steps To Making A Million In The Market report. It will take you through all you need to know, one step at a time.
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