Are you someone that wants to invest, realise the great power investing has on increasing your wealth, but are scared your investment strategies will lose you money?
Are you currently investing but disappointed with your investment returns over the last few months or years?
I’m going to share with you not one, but two strategies that can help reduce any anxiety you feel when making an investment and can ensure that you greatly increase your chances of investment success.
This is not a trick, these two strategies have proven to be successful time and time again for many many years.
Let me explain.
Investment can be scary without the right strategies
Let’s get the scary stuff out the way. There’s no doubt about it, there are times when shares in the great companies of the world will fall in value, sometimes by huge amounts.
There’s lots of reasons for this:
- A company is in financial trouble.
- Legislation and government policy could be bad for business.
- A recession in the economy means people spending less and therefore profits of companies going down and investors selling.
Let’s look at some of the worst investment falls in recent times. In order to illustrate this I am going to use the FTSE 100 share index which is effectively based on the accumulated value of the 100 biggest public companies in the UK.
The chart below shows the fall in value of the FTSE 100 from the end of 1999 to early 2003. Nearly a 50% drop in value! So if you had invested £10,000 at the end of 1999, it would have been worth around £5,000 by early 2003.
Moving forward there was another huge fall from July 2007 to early 2009 in what many of us will remember as the great financial crash. This fall in value was close to 45%!
One of the most simplest investment strategies to follow
So we know the value of an investment can fall quite significantly. So how do we stop this happening or at least reduce the risk?
Well one simple solution is ………. Time.
That’s right time. Let time do its job.
Let me explain.
Here is the FTSE 100 chart starting again at 24th December 1999 but this time going all the way up to the end of 2017.
What you see here is time doing its job. Yes there were two really huge falls over this period where investors would have been panicking like mad but you only ever lose money from an investment if you sell it at a loss.
If you hold on and stay calm while all others around you are losing their heads, what happens? Shares bounce back. Now we never know when this will be or how long it will take but time and time again some of the most significant gains are following periods of significant drops. You just need time on your side. Without it your investment strategies will definitely be more risky.
The return from your investment strategies isn’t just from increased prices
So you may think that the only way your money grows when invested is if the companies or funds you invest in, grow in value.
Yes a company’s rising value over time is important but it’s not the only thing that can increase the value of your original investment.
If you don’t know about them already, let me introduce you to dividends!
Dividends are a share of company profits. Once a company has made money, deducted wages and other expenses they will be left with profits. Most large companies will distribute these profits (called dividends) to shareholders. This is a way of rewarding shareholders for investing in their company.
What’s interesting is just how powerful dividends are when it comes to your investment returns.
How dividends can be the best friend to your investment strategies
When I talk about dividends as an investment strategy I mean dividend reinvestment. This means every time you receive a dividend from your investment you put it back into your investment and buy more shares or units in that investment.
You see what you are using here is the power of compounding. Your money earns money and that new total pot of money earns even more money the next year and so on and so on.
The amazing thing with dividends though is that a huge part of overall investment returns actually come from dividends.
The below chart from David Brett’s article in The Telegraph shows the annual returns of the FTSE 100 with and without dividends.
Using the power of dividends in your investment strategies doesn’t just apply to UK based investing.
Richard Evans in his article in The Telegraph shows corresponding performance for European companies. Purely European share prices vs share prices plus dividends reinvested vs the highest dividend payers only reinvested.
The results are striking! From 1999 to 2013 you would have lost 21% of your value based on prices alone. But if you had reinvested dividends you would have made 27%.
Again in the US, Sam Ro in his article from Business Insider shows that over 40% of the total investment return since 1930 comes from reinvested dividends.
So there you have it, two basic, fundamental, simple strategies, time and dividends that mean investment doesn’t have to be scary. What is scary is missing out on the chance to greatly improve your wealth over the years by not making appropriate investment.
If you now feel more confident but still require some expert help then speak to a Chartered Financial Planner who will be able to understand your needs and develop an appropriate strategy for you. Here is a list of questions to ask when looking for a Financial Adviser. Also check out my ‘Simply Investing’ guide below.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.