Among millennials who don’t invest in the stock market one common objection is: ‘It’s too much of an effort for something I’d only get a few hundred quid out of it.’ But is this sentiment justified?
To begin with, there are two glaring reasons for why millennials shy away from investing. For one, millennials mistrust financial markets, given that they – or we – came of age and entered the job market either during or shortly after the financial crisis.
It is also the case that those in the early twenties to mid-thirties lack the financial resources of previous generations. According to a recent report from the Resolution Foundation, millennials today suffer from an earnings squeeze and a lack of progression in the job market, while having to spend far more of their income on rent and housing than previous generations.
Putting any money into the stock market can be scary if you don’t have much of a cash buffer, ideally three months’ salary in cash.
Those who do have cash spare next need to weigh up whether to go down the saving or investment route. Savings rates are on the rise, but to beat inflation, currently 2.5 per cent, you will have to lock your money away for at least five years.
Moreover, history shows that over the long term, stock market returns have the upper hand over cash. Data from the 2016 Barclays Equity Gilt Study shows that British shares over the past 116 years have typically returned 5 per cent annually (including share price growth and dividend payputs), while cash has returned 0.8 per cent.
Investing small amounts, of say £100 a month, can pay off. If you manage to save £100 a month for five years this would add up to £6000. Invested in the stock market, however, this sum can grow through compounding. Many online brokers have a minimum threshold of £100, but others allow as little as £25 a month.
We have asked Russ Mould, investment director at AJ Bell to crunch some figures to see how much of a return £100 a month could have made. If £100 a month had been invested into a passive global tracker fund over five years, for example Vanguard LifeStrategy 100% Equity, the sum would have grown to £8,466. With the actively managed global equity fund Fundsmith Equity, which is the most-popular investment fund on our sister website Interactive Investor, it would have grown to £10,038. And with a sustainable investment trust, such as Impax Environmental Markets, it would have grown to £8,304.
However, it’s crucial to remember that the stock market rises and falls in cycles, and that the last five years have been a bull market. Mould says: ‘Pretty much everything and anything has gone up for the last five years thank to quantitative easing and record-low interest rates.’ He explains that the exercise we have done shows what can be achieved with £100 a month and it’s a pretty powerful one, but bear in mind the past is no guarantee for the future.
This feature was originally published in Money Observer, 18 May 2018: https://www.moneyobserver.com/our-analysis/heres-why-it-worth-investing-small-amounts