While ensuring that you save money towards retirement each month is a worthwhile idea, making sure it is invested appropriately is just as important. It is all too easy to save hard and then end up with a nest egg by retirement that is insufficient to provide a generous income in older age.
As such, for investors who have a long-term time horizon it may be worthwhile considering investing in a portfolio of stocks. Otherwise, the returns available on other assets may mean that retiring rich becomes a less likely event.
Stock market growth
While the stock market experiences periodic downturns and bear markets, over the long run it has an excellent track record. Indexes such as the S&P 500 and FTSE 100 have posted strong growth over recent decades, and they seem likely to do continue this trend over the coming decades.
Certainly, there are very likely to be challenges along the way that may mean an investor experiences paper losses within their portfolio. But both indexes have been able to recover from their falls to post higher highs, with their annualised total returns generally having been in the high single-digits over the long run.
Therefore, the stock market is a fairly simple means for an investor to generate high prospective returns, while also enjoying significant diversity through owning stocks in a wide range of companies. Since liquidity and dealing costs may also be favourable compared to other assets, the stock market offers a significant amount of flexibility for investors.
By contrast, other assets such as bonds and cash have rather more limited return appeal at the present time. While they may present less risk and could experience lower levels of volatility than the stock market, lower risk generally means that return potential is somewhat limited.
For an investor who has a long-term time period, investments in cash and bonds could fail to significantly outperform inflation. This may mean that they are able to preserve spending power. However, there is a danger that they ultimately lead to a nest egg which is unable to provide the level of income that may be required in retirement.
While investing in property may deliver high returns in the long run, for many people it is not possible have a property portfolio that is sufficiently diverse to limit their overall loss. The high cost of property could lead to many investors having a limited number of sites in their portfolio, which could cause significant losses should there be difficulties with one of their holdings.
Of course, investors with short-term time horizons, or those who cannot risk their capital, may be better off with assets other than stocks. However, for long-term investors a portfolio of stocks could provide them with a balanced risk/reward outlook. This may offer them the chance to retire with a significant nest egg that provides a generous income in older age.
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