Is it insane to invest in the stock market now?

CreditCardChris

steampowered wrote: »

Stocks are a complete no brainer if you are investing for the long term. Make sure you think about the most tax efficient way to do it. Also consider the government bonuses associated with things like the lifetime ISA.


It sounds like you are only looking at the indices while ignoring dividends.

The average dividend yield on the FTSE 100 is 4.2% (its better to invest in a more diversified way than that, I just use the FTSE as an example).

So even if you were unlucky enough to invest right at the top of a bubble and it took 10 years for the share to recover, you'll have been pocketing 4.2% a year in dividends as you go.

Have a read of https://www.nutmeg.com/nutmegonomics/increasing-your-chances-of-positive-portfolio-returns-the-facts-about-long-term-investing/ which has a useful graph showing you the statistical probability of losing money plotted against time in the market.


The stock market is at "all time highs" all the time, because they go up over time, given economic growth and inflation. You only have to look at an index graph to see that.

Do dividend funds perform as well as the index itself though? I'll be honest with you, it's extremely hard to invest my money in this country. The FTSE is only 6.5% higher now than it was back in 2008... Meanwhile the U.S stock market is nearing 100%.

The UK just doesn't create billion pound companies anymore...

kinger101

ZingPowZing wrote: »

(a) But the OP has a job and he's looking at a 20/25 year timeline, so there is a good chance he will be eligible along the way, if not yet. Of course, a civil servant or something would miss out.

(b) Not really. In all cases, you should be able to withdraw the amount you have saved; and in all cases, you should have the option at the end of term to take shares instead, if they are worth more than your savings.. So, it's one of the few bets you can make where you cannot lose. Would suit the OP, from what he has shared on this post.

(a) The overwhelming majority of people who work are not eligible for a sharesave scheme. It doesn't anywhere in OP's post say are eligible for an employer's share scheme. You've inferred this.

(b) You don't seem to know about opportunity cost. You can obviously lose if you only get back what you put in. Or the gain is poorer than might have been achieved with a low-cost tracker.

And aside from the fact that putting all your eggs in one basket is silly, the share schemes are not always tax-efficient in comparison to a pension.

slip_n_slide

I'll be honest with you, it's extremely hard to invest my money in this country. The FTSE is only 6.5% higher now than it was back in 2008... Meanwhile the U.S stock market is nearing 100%.
The UK just doesn't create billion pound companies anymore...

So invest globally. The UK stock market currently has only about 5% (by value) of the stocks available to buy on global stock markets.

Putting only the same 5% of what you're going to invest in shares overall into UK shares is a valid approach. Indeed some people specifically recommend this: see monevator.com/why-a-total-world-equity-index-tracker-is-the-only-index-fund-you-need/

Many investors have a bias towards investing only in their home stock market, and need to be persuaded to broaden their horizons. Not having this bias to start with may well be an advantage.

Thrugelmir

CreditCardChris wrote: »

But if I invest in an index tracker doesn't that mean my portfolio will keep in line with the actual index, not the individual companies in it?

Which index do you intend to follow? There's a multitude to choose from.

Thrugelmir

CreditCardChris wrote: »

Do dividend funds perform as well as the index itself though?

Dividend reinvestment produces the bulk of market returns over the longer term. Taking the UK as an example. Over an 118 year period the average return is just over 5% (allowing for inflation) with dividends reinvested. Without just 0.5%.

As far as the UK is concerned company profitability taken as a whole is under pressure. That's after taking into account the boost given from a weakening pound. While yields may look enticing. Sustainability for some companies must be questioned. Climate change agenda may simply add additional cost pressures as well.

Arthurarthur52

Hubby started doing this a few years ago, Mainly buying shares in companies we knew the big high street names. Many offered perks or discounts and of course dividends. He bought through Halifax and paid £2 a transaction. He got burnt a couple of times like Woolworths, and heavy into Hornby hobbies as close to us and just signed with Harry Potter goods. He now has about £2000 invested and last year got £85 in dividends. I changed companies 4 years ago and invest £100 in a BAYE now around 270 shares and £150 in a SAYE. one year in and the shares are £5 up. Worse case is I get £5400 in 24 months time. It’s a bit like gambling when the fun stops STOP

bowlhead99

CreditCardChris wrote: »

Do dividend funds perform as well as the index itself though? I'll be honest with you, it's extremely hard to invest my money in this country. The FTSE is only 6.5% higher now than it was back in 2008...

Remember that the *capital value* of the FTSE index is only 6.5% higher but the *total return* from the index if you'd invested into it includes not just the high level of dividends received each and every year but the fact that the dividends can be re-invested when they are received, and many of the periods in which they would have been reinvested since 2008 would have been at lower prices than the 2008 or 2019 values, boosting the return

Meanwhile the U.S stock market is nearing 100%.

The US stock market has a higher capital return and lower dividend return because investors in the US firms are not so keen on dividends as a way of returning money to shareholders (partly for tax reasons) and also because of the nature of the companies that make up the index. For example Google and Amazon don't pay dividends and go all out for growth. Whereas in the UK the largest companies in the index are heavily skewed to certain industries such as oil, tobacco, banks and big pharma which are mature giant businesses paying reliable dividends but don't grow an awful lot.

Over the last decade or so, the US market has been a great place to be - and especially when measured in pounds, as dollars became more valuable in pounds after our vote to leave the EU. Whereas, in the previous decade or so leading up to 2007, it wasn't (compared to other regions) especially when measured in currencies other than dollars - as the dollar weakened to over $2 to a pound.

I wouldn't suggest to put all your money into a UK index heavily weighted to a few giant banks, oil/mining companies and big pharmaceuticals. But then I wouldn't invest it all in the USA just because I saw the US index go up rapidly. Over the next decade is the US market going to double again by Trump announcing he'll double the tax cuts and halve the interest rates again? The S&P500 are already being valued at a higher multiple of their annual profits than in previous decades.

The UK just doesn't create billion pound companies anymore...

A UK private equity firm had supported Fever Tree drinks owning a quarter of it in 2013, valuing it a little under £50m. By 2014 with a placing price of of £1.34 per share, the business had a market capitalisation at IPO of £154 million. Today with a price of over £17 it has a valuation of over £2 billion (and six months ago it was going for over £30, comfortably over £3 billion).

CreditCardChris

Thrugelmir wrote: »

Dividend reinvestment produces the bulk of market returns over the longer term. Taking the UK as an example. Over an 118 year period the average return is just over 5% (allowing for inflation) with dividends reinvested. Without just 0.5%.

As far as the UK is concerned company profitability taken as a whole is under pressure. That's after taking into account the boost given from a weakening pound. While yields may look enticing. Sustainability for some companies must be questioned. Climate change agenda may simply add additional cost pressures as well.

I'm thinking of splitting my deposits between the 5 or 6 major indices, one for each region. Then I might allocate ~5% - 10% into something specific like a biotech fund or a clean energy fund, something like that.

Just continue dollar cost averaging each month and see where it's at after 20 - 25 years I guess.

I thought the stock market return averaged at 7% or 8% a year? Where are you getting 0.5% from?

Thrugelmir

bowlhead99 wrote: »

Over the last decade or so, the US market has been a great place to be

Can the FAANG's live up to investors expectations though. Been a key driver of the broader market for the past 5 years. Having risen 75% themselves in that timeframe.

AnotherJoe

CreditCardChris wrote: »

I'm not really trying to time the market, but at the same time I'd prefer not to buy at the absolute tippy top if possible

IME here, nearly everyone who says "I'm not trying to time the market" or "I know market timing is impossible" then goes on to try and time the market
Look at it another way, If you think this is the exact (or even rough) tippy top for the next 30 or so years, you shouldn't be investing.
if it's not, and it crashes after you've put a couple months in at what turns out to be the high point for the next 2,3,4 etc years then rejoice because for the next what, 2,3, 4 years that will be irrelevant compared to all the cheap investments you'll be buying.