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We're all aware of investment risk. After all, stock markets go down don't they?
But many people are less aware of the big risks of doing nothing with their money.
In the second video in The Lolly Investor Programme series I look at how:
mean you have to take some risk with your money in order to grow some real wealth.
You can also watch the first video in the series.
Visit our Lolly Investor Programme page to see more videos in the series.
Hi, welcome back to The Lolly Investor Programme, my new weekly video series for novice investors trying to work out what to do with ISAs and pensions.
This week we’re looking at the three reasons why people are increasingly turning to the stock market as way of growing their wealth.
In my first video I referred to the ‘money-making power of the stock market’.
When I said those words I could just imagine the cries of disbelief from people who think the stock market is dangerous, a place to lose money, not make it.
I understand that for some people the idea of investing is like being a construction worker on the top of the ‘Shard’, that’s the epic building near London Bridge nearing completion behind me.
In my next two videos I’m going to look at how you can manage that risk and make it work for you. How you can have a safety harness and belt, as it were – possibly even a metaphorical crane to help you on your way!
Today though, I’m looking at the three risks that mean you can’t stay on the ground with your money stashed under a mattress or even in the bank.
We all know that inflation is the rate at which the price of goods and services goes up. But did you know the terrible effect that it can have on your money?
The Bank of England website has a great tool to show what inflation does to the value of money.
Last year in 2011 you needed £1.38p to buy the same goods and services that cost you just £1 in 2000.
Annual inflation over 2000 to 2011 averaged 2.9%, which might not sound too bad until you realise it reduced the spending power of the pound in your pocket by 28% to 72p!
In other words you’re 28% poorer if you haven’t had a pay rise or held assets that have grown faster in value than inflation.
If I set the inflation calculator to 1966, the year I was born, the effect is even worse.
Inflation over my life time has averaged at 6.2% a year. It means I need £15.28 to buy things that cost £1 when I was born.
Can you imagine the effect that will have on your money by the time you come to retire? Inflation is the number one reason why you need to save as much as you can before retirement.
Obviously the medical advances behind increased life expectancy are good news. On average a man currently aged 65 can expect to live another 18 years, a 65-year-old woman another 20 years.
The downside of this longer life is that it makes being a pensioner very expensive. Will you have enough money to survive 20 years of retirement?
Looking at these figures it’s no surprise the government is gradually raising the state pension age to 68, which brings me on to my third risk.
How much do you think the state pension will be by the time you stop work?
It’s impossible to say exactly but it’s clear the direction we are going on. The state pension is a safety net to keep people out of absolute poverty.
If you want more than that from a possibly lengthy retirement, you have to save and you have to save in a way that will generate a real return above inflation.
That means the stock market.
Remember, investing may be risky but inflation, longer life expectancy and a shrinking state pension mean the risks of not investing are even greater.
Next week I will look at why investing in the stock market doesn’t have to be as scary as it sometimes sounds.