One of the motivations for running our #loveyourmoney series is to encourage women in their 50’s to make informed decisions about their money. Before the financial crisis this wasn’t totally necessary. You could earn a decent rate of interest in a bank or building society deposit which protected your spending power against inflation without risking losses on the amount you put in. But the financial crisis has changed everything. For the last nine years the rewards for leaving your money on deposit have been close to zero and leaving you worse off in spending power terms year after year.
Unfortunately some of us are still behaving in pre-financial crisis mode. About a third of women in their 50s have cash savings in excess of £5,000, yet less than 10 per cent of this group own a stocks and shares ISA; which is a pity. A £5,000 investment in the UK stock market nine years ago would be worth about £14,000 now. And if your investment was in a ‘stocks and shares ISA’ your returns would be tax free.
We will examine how stocks and shares ISAs work in the next blog. But first we are going to ask you 3 questions to determine whether you are ready to take the plunge in the stock market.
- Are you paying interest on your credit card?
If the answer is yes; your best course of action is to plan to pay off this outstanding debt and forget about the stock market for now. The reasoning is straightforward, if your APR is above 10 per cent you are better off paying down the debt as your likely return from the stock market will be below 10% a year in the long run.
- Do you have substantial cash savings?
If the answer is yes, your money could be put to better deployed elsewhere. As we have said above, leaving your money in the bank at current rates virtually guarantees that you suffer an erosion of spending power over time.
- Are you prepared to invest for the long term?
If the answer is yes, the stock market may be for you. The long term is important in two respects practically and psychologically.
Let me explain. Based on data going back to 1970, if you invest in the stock market for one day, the odds are close to 50-50 that you either make or lose money. But over a year the chances that the UK stock market will be down is roughly 20% or one in five. Hold for 7 years and you would be very unlucky to lose money (probably one chance in 20). The message is that you are more likely to incur losses in the early stages of your investment experience and this is when many people give up. But if you ignore day-to-day moves (after all you don’t check your house price everyday), and stick to a long term strategy the odds are you will do much better than leaving your money in the bank.
Part 1 – Are you Scared of the Stock Market?
Part 2 – Making Your Money Work for You
Part 3 – A Brief Guide to the Two Faces of Debt
Part 4 – Are you Ready for the Stock Market?
Part 5 – Three-Point Plan for the Investors New to the Stock Market
Part 6 – Should I Consolidate my Pensions?