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The best way to get rich

If you’re not already rich, you probably want to get rich.

I think the stock market is one of the easiest ways to do that, although it will take a while.

In this video, we look at the long-term performance of the stock market, and compare it to how other assets have performed over the long term. I think you’ll be pretty impressed by the numbers I’ve found.

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Transcript

Hi. In this video I'm going to look at the best way to build wealth in the long term. If you like, the best way to get rich. What I'm going to do is compare the performance of different assets over the long term and see how they've done. I'm going to compare three assets: equities, that's the stock market; gilts, that's government bonds; and cash in your typical bank savings account.

Let's look at what happened last year in 2013. The stock market had a fantastic year. If you invested, let's say, £1,000 into the stock market in a typical UK tracker fund, that just reflects the whole British stock market, your money would've grown 17.4% over the year, and then you'd add inflation on top of that. This is a real return.

Gilts, meanwhile, did really badly. They delivered a real return of -9.6%. Cash did pretty poorly, too, -2.3% over the year. I guess that's not so surprising. We know that really all savings accounts have been paying rubbish interest rates in the last few years.

Now, obviously, equities won massively last year, but one year is not long enough to judge the performance of all the assets. We need to look at some more longer-term figures.

So, let's look at what's happened over the last ten years. Equities have delivered an annual return of 5% a year, and you add inflation on top of that. So pretty good for a real return.

Gilts have also done pretty well, delivered a real return of 2.5% a year. Whereas with cash, the value of your wealth is actually being eroded once you take inflation into account, and the real return is -0.5% a year. Still very clearly, equities is the big winner here.

Now, let's look at 20-year performance. Equities have grown at 4.1% a year in real terms. Gilts actually aren't so far behind at 3.5% a year. Cash has come in at 1.3% a year.

Now, actually, the last 20 years have been interesting. You, normally, over most 20 year periods, expect a bigger differential between equities and gilts over such a long period. Actually, over the last 20 years, the performance of the stock market has been a bit disappointing.

Gilts have done exceptionally well, because we started out 20 years ago in a period of high inflation. We've ended up in a period of low inflation. You'd expect gilts to do well when that happens.

My expectation is, over the next 20 years, inflation will start to pick up again at some point, so gilts won't do so well. Equities will probably do better.

But the clear point is, regardless of the fact that gilts have done exceptionally well, equities still won out as the best performing asset over the long term. So let's put these percentages into cash terms. Over ten years, £1,000 in equities would come out at over £1,620, and you add inflation onto that. Over 20 years, £1,000 turns into £2,233, and we add inflation on top of that. I think it's very clear equities are a great way to get rich over the long term from these numbers.

Now, I know some of you are probably saying, "What about property?" I've not put property in this table, because it's very hard to get figures where you're comparing apples with apples. It's easy to get house-price figures, seeing how house prices have performed over 20, 30, 40 years, but what you can't get are figures that add into that rent the landlords would receive. You're adding on the rent to the house-price gains.

These figures in these tables up here all include the income. With equities, it includes the dividends that are paid to shareholders. With gilts, it includes the coupons that are paid to the owners of gilts.

With property, we don't get the rent included, but I can give you some house-price figures from the Nationwide house-price index. These are real terms, inflation-adjusted figures. Over the last ten years, £1,000 invested in property would now be worth £913 in real terms. That's a 0.9% a year fall.

So, over the last ten years, it's very clear that equities have done way better than residential property in the UK. Now, aside from the fact that the last ten years have been exceptional, properties performed exceptionally badly. Over other ten-year periods, 20-year periods, you would expect property to do better.

Having said that, I still think equities are the best way to go. If you're investing in property, it's a lot of hassle. I know this. I'm a landlord at the moment. I'm probably going to sell my investment flat, because it's just proved far too much hassle for me.

There's also the issue of concentrated risk. If something goes wrong in the area where my flat is, my wealth will be dramatically reduced. I'm so exposed to just that one flat. With a stock-market portfolio, I'm obviously exposed to a wide variety of different companies operating in countries all over the world. My risk is much less concentrated.

Talking of risk, the point is if you invest in the stock market over long 20-year periods, the stock market becomes a much less risky investment. Actually, if you look at 20-year periods over the last sort of 150 years, equities have actually beaten cash in 99% of the time. You've got a 99% chance that equities will beat cash over 20-year periods. When you're comparing equities with gilts, there's a 90% chance that equities will beat gilts.

For me, it's clear that equities are the best way to get rich over the long term. Equities are the way to go. I'm probably going to sell my flat, because of the hassle and put more money into the stock market. I'm confident I'll do well from that investment strategy. I really would urge you to consider doing the same thing.

I'll be back with another video next week. If you want to see our next video, don't come to the YouTube site. Go to the MoneyWeek site. That's MoneyWeek.com/YouTube. We're not now posting all our new videos on YouTube, only on MoneyWeek.com/YouTube. You'll also find there the full archive of all the investment videos we've done up until now.

So I hope to see you again soon. Until then, good luck with your investing.

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One Response

  1. 02/03/2014, Lupulco wrote

    Interesting article, but it just proves that figures can be made to prove anything.

    Take December 1999. FTSE 6930. to December 2009. FTSE 5412 a fall of 20%.
    plus a big swing FTSE 6930 to 3567 and then back to 6721 and down to 5412.

    Yes you will say that cost averaging will smooth things out, which up to a point it does.
    But the real answer is do your own research, these videos are good, but there is lots of info in public libraries.

    As someone said, “How too make a small fortune in the stock market? Start with a large one”.
    But saying that treat it like a hobby, only use your own money, money that you can afford too lose. Just enjoy the roller coaster ride, the largest on-line game one can play.

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