Is it insane to invest in the stock market now?

bowlhead99

Thrugelmir wrote: »

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.

The thrust of that part of the post was simply to flag to the OP - who had said he would find it difficult to invest in the UK because the US performed so much better - that:

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

"Whereas, in the previous decade or so leading up to 2007, it wasn't."

I have no idea if the FAANGs will meet investor's expectations, and was deliberately highlighting that investment in one particular area or mix of investments can give quite different results from one period to the next. As an aside, of the five I have direct holdings of both Netflix and Alphabet, and have been in and out of Amazon a few times over the years. The others only via fund/IT.

CreditCardChris wrote: »

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%.

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

Thruglemir's post is just quoting the common myth that dividends make up most of the returns from investing.

This quote or one like it is always trotted out with the best of intentions when a naive newbie says that investing doesn't appear very lucrative because such and such an index hasn't gone up very much from it's last all-time high, x years ago. The newbie will invariably be only looking at the capital value of the FTSE or other famous index that they hear about in the media and it is important for them to be aware that the capital movement is only one part of total return. The other part is received dividends which can (and should) be invested for more dividends and more growth.

Still, it always makes me cringe when someone says the dividends are by far the most important part. It is painful to keep explaining it.

1) You are right that the typical return of the stockmarket in nominal terms (i.e. before you adjust downwards to take account of inflation) averaged over the long term might be about 7-8% annualised (i.e. compounded annually).

2) For the UK FTSE (which due to its particular asset mix as mentioned up the thread, pays quite a high dividend yield compared to US or global stock averages), the rate of dividend might be 3-4%+ (i.e. could be half or more of the total return) while for the US S&P or the global average, it is typically a bit less, e.g. 1%-2.5%

3) So clearly as the dividends on a global average are not substantially more than 3.5 to 4%, on a 7% to 8% total return of the market, it is simply not the case that dividends are providing substantially most of the return. Instead:

4) If you invest £100 in a market index fund generating 7.5% gross return and incurring 0.5% of running costs, it may turn into £107 of total value. But this could, in practice, be £103.5 of asset value and £3.5 paid out to you as a cash dividend. You have the option to take the dividends away and spend them, or throw them in the bin, or reinvest them back into the fund.

5) Obviously given the choice, if we are trying to maximise our total returns we would seek to reinvest the dividends back into the index fund (into the companies in the index) as soon as the dividends were made available to us. Then we will have £107 in the fund, and hopefully it will grow by another net 7% of capital and income over the next year, and we can do the same thing the year after (again reinvesting the capital gains and the dividend), and so on. By the time you have got 7% annualised total return compounded for a decade you have made 97% profit, turning your £100 into almost £200.

6) In that example, how much of the 'doubling our money in a decade' was due to dividends and how much to growth of the business? About half and half is the fair answer. Both types of return were giving you about 3.5%, and as you allowed all the returns to remain inside the fund, you were getting 7% total each and every year.

7) The 'urban myth' that dividends provided most of the return comes from the choice we made in line 4. Dividend is paid out by the company to us as shareholders, and arrives as cash. So investment value has been taken out of the investment and put into our own hands. Do we reinvest that money that was taken out of the investment, or perhaps go on a shopping trip, or do we throw it in the bin?

8) Imagine we throw it in the bin. We had started with £100 and after a year end up with £103.5 of value in the investment and 3.5 in the bin. The next year the £103.5 that didn't go into the bin will produce the same return (7% net growth with half as capital value increase and half as dividend). So the £103.5 would increase to £107.12 of investment value with another £3.62 of cash to throw into the bin. After ten years, instead of growing the £100 at 7% to reach £197 (£100 x 1.07^10) we have only grown it at 3.5% to reach £141 (£100 x 1.035^10).

9) By comparing the outcomes with and without 'reinvested dividends' you can make some bold conclusions:

(a) you can say that with reinvested dividends you almost made £100 profit, while without reinvested dividends (throwing them in the bin instead) you only made about £40 profit, so comfortably over half the return came from the magic of reinvested dividends

(b) if you look at that annual return with capital growth only, without dividends, of only 3.5% (because the dividends were thrown in the bin) and you recognise that inflation might be 3% a year, the real return from an investment without dividends is only 0.5%.

10) Armed with those bold conclusions, we can go and tell investment newbies that most of the return in the markets over time comes from reinvested dividends.

Of course, the conclusions are silly:

- nobody is going to make an investment with the intention of having the company send them a cash return to partially compensate them for taking the risks, and then throw that cash into the dustbin.

- likewise if we pretended for a moment the capital growth didn't exist, we might decide that the dividends are poor because they only marginally cover inflation with 0.5% to spare; that's just like what we have done in instead imagining the dividends didn't exist and spuriously saying that the capital growth only marginally covers inflation with 0.5% to spare so the capital growth is poor.

Yes, you end up with more than twice as much money if you compound 7% return for ten years instead of only compounding 3.5% return for ten years. So, to maximise the long term return the logical thing to do is not to take money out of your investment to put in the bin or to go on a shopping trip and fritter it away on crap. Instead, reinvest it in the same investment or into another investment project and you will reap the rewards.

But that advice of 'don't take money off the investment table' is not specific to dividends only. It applies to all your investment money, whether the money you were thinking of taking away was (i) your original capital, or (ii) growth on your original capital from a change in share price, or (iii) dividends received.

Imagine for example you invested £10,000 in 10000 shares at £1 per share and at the end of the year they were worth £1.035 each for £10350 of value, while at the same time £350 of cash arrived in your bank account as a dividend. Overall, £10700 of value.

Some people might think, ooh, the price has gone up, I will 'take my profits' by selling 338 shares for another £350 of cash and leaving 9662 shares worth £10,000. So they have a £10,000 investment and £700 in the bank (overall, it's a 7% return).

That person might decide to 'reinvest the dividend' and spend the £350 dividends buying 338 more shares so they have 10,000 shares again (worth £10350) and leaving £350 cash in the bank (the cash in the bank being the proceeds of cashing out the investment value gains). They could then spend the cash in the bank, or perhaps throw it into the dustbin just like the idiot who threw his dividends into the bin.

Overall, their investment is sitting at £10350 going into the second year; 3.5% higher than it started the first year. If they keep doing that process year after year, they will be compounding their return at 3.5% and their asset value will reach 41% after a decade, falling far short of the 97% return they would have been able to get by by letting all the 7% annual return stay in the investment.

Surprise surprise, the shortfall from cashing out the investment growth each year and not letting it compound up, is just as bad as taking the dividend out each year and not letting it compound up.

So it is not the case that 'most of the returns in the stock market over x decades came from reinvesting dividends'. What is true is that most of the returns came from avoiding actions that destroy wealth - an idiot move such as taking money away from the investment pot and throwing it in the bin. The money that you don't take away and throw in the bin, and you leave invested in the index instead, will benefit your returns because you will earn more dividends on it and more growth.

It's true to say that there are some companies where the share price is boring and most of the returns genuinely come from dividends (e.g. utilities, tobacco etc). There are others where the dividends are slim or non existent and most of the returns from from capital growth (e.g. Google etc). There are some which are complicated - money returned to shareholders as capital rather than dividends, through share buy-backs. Either way, if you simply keep reinvesting all the money you receive from your investment portfolio, right back into your investment portfolio, you will maximise the amount of money you have 'working for you' at a point in time, and so enhance (or avoid damaging) your overall returns.

_CC_

If you don't own a property but hope to do so, I would first fill up a HTB ISA.

Sea_Shell

The "top of the market" is always the "top of the market" in an overall rising market!!

Each new high, being a RECORD new high.

Yes, there will be bumps in the road (or major events), but that's why the long game has to be played.

We all need to cash-out one day (otherwise what's the point of the investments in the first place), whether that be to buy a home, retirement, or to pay for a private operation etc.

You just have to hope that come that day....you are "up"!!!

You'd have to be pretty unlucky to invest for 20+ years, and then HAVE to cash in, just at the wrong time, but such is life.

That's why investments should be a part of your overall saving strategy and not the be all and end all.

webjaved

_CC_ wrote: »

If you don't own a property but hope to do so, I would first fill up a HTB ISA.

I'd be quick for those that have not opened an account, there is a deadline approaching.

https://www.express.co.uk/life-style/life/1199772/Martin-Lewis-money-isa-help-to-buy

CreditCardChris

bowlhead99 wrote: »

The thrust of that part of the post was simply to flag to the OP - who had said he would find it difficult to invest in the UK because the US performed so much better - that:

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

"Whereas, in the previous decade or so leading up to 2007, it wasn't."

I have no idea if the FAANGs will meet investor's expectations, and was deliberately highlighting that investment in one particular area or mix of investments can give quite different results from one period to the next. As an aside, of the five I have direct holdings of both Netflix and Alphabet, and have been in and out of Amazon a few times over the years. The others only via fund/IT.

Thruglemir's post is just quoting the common myth that dividends make up most of the returns from investing.

This quote or one like it is always trotted out with the best of intentions when a naive newbie says that investing doesn't appear very lucrative because such and such an index hasn't gone up very much from it's last all-time high, x years ago. The newbie will invariably be only looking at the capital value of the FTSE or other famous index that they hear about in the media and it is important for them to be aware that the capital movement is only one part of total return. The other part is received dividends which can (and should) be invested for more dividends and more growth.

Still, it always makes me cringe when someone says the dividends are by far the most important part. It is painful to keep explaining it.

1) You are right that the typical return of the stockmarket in nominal terms (i.e. before you adjust downwards to take account of inflation) averaged over the long term might be about 7-8% annualised (i.e. compounded annually).

2) For the UK FTSE (which due to its particular asset mix as mentioned up the thread, pays quite a high dividend yield compared to US or global stock averages), the rate of dividend might be 3-4%+ (i.e. could be half or more of the total return) while for the US S&P or the global average, it is typically a bit less, e.g. 1%-2.5%

3) So clearly as the dividends on a global average are not substantially more than 3.5 to 4%, on a 7% to 8% total return of the market, it is simply not the case that dividends are providing substantially most of the return. Instead:

4) If you invest £100 in a market index fund generating 7.5% gross return and incurring 0.5% of running costs, it may turn into £107 of total value. But this could, in practice, be £103.5 of asset value and £3.5 paid out to you as a cash dividend. You have the option to take the dividends away and spend them, or throw them in the bin, or reinvest them back into the fund.

5) Obviously given the choice, if we are trying to maximise our total returns we would seek to reinvest the dividends back into the index fund (into the companies in the index) as soon as the dividends were made available to us. Then we will have £107 in the fund, and hopefully it will grow by another net 7% of capital and income over the next year, and we can do the same thing the year after (again reinvesting the capital gains and the dividend), and so on. By the time you have got 7% annualised total return compounded for a decade you have made 97% profit, turning your £100 into almost £200.

6) In that example, how much of the 'doubling our money in a decade' was due to dividends and how much to growth of the business? About half and half is the fair answer. Both types of return were giving you about 3.5%, and as you allowed all the returns to remain inside the fund, you were getting 7% total each and every year.

7) The 'urban myth' that dividends provided most of the return comes from the choice we made in line 4. Dividend is paid out by the company to us as shareholders, and arrives as cash. So investment value has been taken out of the investment and put into our own hands. Do we reinvest that money that was taken out of the investment, or perhaps go on a shopping trip, or do we throw it in the bin?

8) Imagine we throw it in the bin. We had started with £100 and after a year end up with £103.5 of value in the investment and 3.5 in the bin. The next year the £103.5 that didn't go into the bin will produce the same return (7% net growth with half as capital value increase and half as dividend). So the £103.5 would increase to £107.12 of investment value with another £3.62 of cash to throw into the bin. After ten years, instead of growing the £100 at 7% to reach £197 (£100 x 1.07^10) we have only grown it at 3.5% to reach £141 (£100 x 1.035^10).

9) By comparing the outcomes with and without 'reinvested dividends' you can make some bold conclusions:

(a) you can say that with reinvested dividends you almost made £100 profit, while without reinvested dividends (throwing them in the bin instead) you only made about £40 profit, so comfortably over half the return came from the magic of reinvested dividends

(b) if you look at that annual return with capital growth only, without dividends, of only 3.5% (because the dividends were thrown in the bin) and you recognise that inflation might be 3% a year, the real return from an investment without dividends is only 0.5%.

10) Armed with those bold conclusions, we can go and tell investment newbies that most of the return in the markets over time comes from reinvested dividends.

Of course, the conclusions are silly:

- nobody is going to make an investment with the intention of having the company send them a cash return to partially compensate them for taking the risks, and then throw that cash into the dustbin.

- likewise if we pretended for a moment the capital growth didn't exist, we might decide that the dividends are poor because they only marginally cover inflation with 0.5% to spare; that's just like what we have done in instead imagining the dividends didn't exist and spuriously saying that the capital growth only marginally covers inflation with 0.5% to spare so the capital growth is poor.

Yes, you end up with more than twice as much money if you compound 7% return for ten years instead of only compounding 3.5% return for ten years. So, to maximise the long term return the logical thing to do is not to take money out of your investment to put in the bin or to go on a shopping trip and fritter it away on crap. Instead, reinvest it in the same investment or into another investment project and you will reap the rewards.

But that advice of 'don't take money off the investment table' is not specific to dividends only. It applies to all your investment money, whether the money you were thinking of taking away was (i) your original capital, or (ii) growth on your original capital from a change in share price, or (iii) dividends received.

Imagine for example you invested £10,000 in 10000 shares at £1 per share and at the end of the year they were worth £1.035 each for £10350 of value, while at the same time £350 of cash arrived in your bank account as a dividend. Overall, £10700 of value.

Some people might think, ooh, the price has gone up, I will 'take my profits' by selling 338 shares for another £350 of cash and leaving 9662 shares worth £10,000. So they have a £10,000 investment and £700 in the bank (overall, it's a 7% return).

That person might decide to 'reinvest the dividend' and spend the £350 dividends buying 338 more shares so they have 10,000 shares again (worth £10350) and leaving £350 cash in the bank (the cash in the bank being the proceeds of cashing out the investment value gains). They could then spend the cash in the bank, or perhaps throw it into the dustbin just like the idiot who threw his dividends into the bin.

Overall, their investment is sitting at £10350 going into the second year; 3.5% higher than it started the first year. If they keep doing that process year after year, they will be compounding their return at 3.5% and their asset value will reach 41% after a decade, falling far short of the 97% return they would have been able to get by by letting all the 7% annual return stay in the investment.

Surprise surprise, the shortfall from cashing out the investment growth each year and not letting it compound up, is just as bad as taking the dividend out each year and not letting it compound up.

So it is not the case that 'most of the returns in the stock market over x decades came from reinvesting dividends'. What is true is that most of the returns came from avoiding actions that destroy wealth - an idiot move such as taking money away from the investment pot and throwing it in the bin. The money that you don't take away and throw in the bin, and you leave invested in the index instead, will benefit your returns because you will earn more dividends on it and more growth.

It's true to say that there are some companies where the share price is boring and most of the returns genuinely come from dividends (e.g. utilities, tobacco etc). There are others where the dividends are slim or non existent and most of the returns from from capital growth (e.g. Google etc). There are some which are complicated - money returned to shareholders as capital rather than dividends, through share buy-backs. Either way, if you simply keep reinvesting all the money you receive from your investment portfolio, right back into your investment portfolio, you will maximise the amount of money you have 'working for you' at a point in time, and so enhance (or avoid damaging) your overall returns.

Thanks for taking the time to write this post. I do understand the benefits of reinvesting dividends of course but what I'm trying to figure out is if after say 20 years, you'll have more money by reinvesting in a small growing index but with higher than average dividend payout (like the FTSE) or if you'd have more money after 20 years by investing in a rapidly growing but smaller dividend payout index like the S&P.

I'd be curious to know if you put £10,000 into the S&P or NASDAQ 20 years ago and £10,000 into the FTSE 100, one being focused on rapid growth while the other being focused on dividend payout, which investment would have returned the most?

Appreciate the post.

CreditCardChris

_CC_ wrote: »

If you don't own a property but hope to do so, I would first fill up a HTB ISA.

Already got one I swooped in and opened one last week as the deadline was approaching.

seacaitch

CreditCardChris wrote: »

I'm 30 years old and have never invested in the stock market...

It's about time you started, preferably using a Pension as either your sole or at least primary investment wrapper, in order to secure tax relief and ideally employer contributions in addition to your own.

CreditCardChris wrote: »

I take one look at the stock market (S&P) for example and I instantly think "not a chance I'm buying into that parabolic bull run". Then of course it just continues going up, month after month.

I'm not scared of losing my money because I know the stock market will always recover, I'm scared of not being able to make a profit. That would be the nail in the coffin wouldn't it? I put off investing during the biggest bull run since the dotcom bubble and then when I finally do decide to invest, I end up with absolutely pathetic returns like 20% after 20 years.

Some points:

1. Aged 30, your investment horizon is likely to be somewhere in the region of 25-55 years, or longer. Furthermore, you're likely to be contributing to these investments, hopefully via some sort of regular monthly investment program, for the next 25 years or longer. This all means that volatility is your friend, and you should have no concern whatsoever about steep falls in markets within the next decade or two.

2. I think the probability of you enjoying a total return of ~20% after 20 years of sensible low-cost investing is extremely low. In any case, you have no control over that, so little point in wasting mental energy on it.

3. While you understandably are focusing on the downside, it can also be useful when investing to simultaneously retain a degree of optimism and be open to the possibility of much better outcomes. For example, I think it's possible that within 15 years the S&P 500 reaches the 10,000 index level - that's not a forecast but I think that outcome is feasible.

4. Of course, your investment plan wouldn't (shouldn't) require that sort of nearer-term investment performance: your potential investment horizon is so long that you've plenty of time to hope that you happen to have useful sums invested during periods when markets are favourable.

5. Finally, the earlier you can start investing the better it is for gaining experience with the process, discipline and mechanics of investment and, crucially, experience of the psychological and emotional aspects of having money at risk, subject to the ebb and flow of economies and investor moods. Over time, you build a resilience which enables you to act more sensibly (considered & disciplined vs. emotional & reactive) and be less prone to making very expensive mistakes, particularly during bouts of market stress which come along from time to time.

Crack on

Thrugelmir

CreditCardChris wrote: »

Thanks for taking the time to write this post. I do understand the benefits of reinvesting dividends of course but what I'm trying to figure out is if after say 20 years, you'll have more money by reinvesting in a small growing index but with higher than average dividend payout (like the FTSE) or if you'd have more money after 20 years by investing in a rapidly growing but smaller dividend payout index like the S&P.

I'd be curious to know if you put £10,000 into the S&P or NASDAQ 20 years ago and £10,000 into the FTSE 100, one being focused on rapid growth while the other being focused on dividend payout, which investment would have returned the most?

Appreciate the post.

You'd probably be better off investing in a Global Equity fund. That way you'll get the best of all worlds. Extrapolating from such a successful market such as the US can lead to “success” bias over a relatively short period of time. Also gives a misleading view of other equity markets. The drivers behind the US stock market rise are very clear to see.

Thrugelmir

bowlhead99 wrote: »

while for the US S&P or the global average, it is typically a bit less, e.g. 1%-2.5%

The historical average yield of the S&P 500 is 4.41%.

DairyQueen

CreditCardChris wrote: »

but what I'm trying to figure out is if after say 20 years, you'll have more money by reinvesting in a small growing index but with higher than average dividend payout (like the FTSE) or if you'd have more money after 20 years by investing in a rapidly growing but smaller dividend payout index like the S&P.

I'd be curious to know if you put £10,000 into the S&P or NASDAQ 20 years ago and £10,000 into the FTSE 100, one being focused on rapid growth while the other being focused on dividend payout, which investment would have returned the most?
.

You are overthinking this. You are so concerned about the potential downside of S&S investments that you are over-complicating. Experts can't predict the markets. Nobody has a crystal ball that can tell you when to invest and what to invest in. Using historic data about individual sectors and regions as a guide to future investment is futile.

As a new investor, keep things simple until your knowledge and confidence rise a few notches.

Points:
1) Why are you investing?
2) Over what timescale?
3) What is your attitude to risk? Could you stay hands-off in the market fell 50%? 20%?

The answers will determine your asset split between equities and fixed interest.

4) Diversification is vital. Owning a single global fund that is highly diversified across regions and sectors, and automatically rebalances, is a great starting point for a newbie.

Only a very experienced DIY-er would attempt to outperform markets. The knowledge of thousands of experts contributes to the performance of index trackers. Passives are invested in ,000s of companies.

The only decisions you need to make are:
1) Platform (costs are very important)
2) How much to allocate to fixed interest (depends on your attitude to risk)
3) Which fund offers your preference of regional and sector weightings.
4) Tax efficiency. (Pension v ISA)

Procrastination is your enemy. Choose a platform and one of the VLS (or similar company offerings). Begin investing and continue researching.

With time and research you will begin to feel more comfortable about your investment decisions. This forum is a great source and you will quickly identify those posters who know their stuff (and those who you can safely ignore). The knowledgeable ones don't always agree on the detail but they offer different perspectives - one of which may be more applicable to your circumstances.

This has been my best source for financial planning. I have been given excellent information and pointed toward other valuable sources. I am no expert but have reached the comfort level courtesy of guidance kindly offered by this forum.

First things first...
Keep it simple. Don't try to outperform or time markets. Choose a fund. Check the documents. Understand the difference between different share classes. Use that fund to learn the basics. When you don't worry at every market downturn you will have cracked the confidence issue. Your investments will be up-and-down like a yo-yo. That goes with the territory.

Oh, and never, ever put all your eggs in just a dozen company baskets - let alone one basket. Single share investments are definitely an area best left to the very experienced.