Hardly a day goes by without a dire warning dropping into my email inbox. Various organisations out there are keen to tell us something that we already know – that most of us are not saving enough for our retirement. Here is a sample, from MetLife. “Nearly one in five retirement savers are unhappy with their pension savings or fear they have wasted money by saving for retirement”. Of savers over the age of 45, “12% wish they hadn’t bothered saving for retirement while 6% are unhappy with their retirement savings despite the recent stock market revival.”
“73% or retirement savers lack confidence in the ability of the stock market to deliver their retirement income ambitions, and nearly half would be interested in paying for guarantees on their pension funds with a view to protecting their capital in return for giving up some gains.”
This is all depressing stuff, and to make matters worse, I also receive a number of emails telling me that house prices are on the rise once again. You can see what is going to happen. Savers are going to give up on the stock market, rely upon the rising value of their home and consider the various ways of turning their pile of bricks and mortar into a monthly income.
But I will not be joining them. My retirement savings are in shares and I have absolute confidence that they will deliver me an early retirement, liberally sprinkled with luxury cruises, fine wine and lazy days on the golf course. But then I do not invest in the same way that most people do…
Forget property, it’s stocks you need
Let me try to unravel the problem. People understand property. It isn’t complicated and you can’t ignore the facts. A house that cost £20,000 30 years ago could now be sold for £400,000.
But few people really understand the stock market. So they hand their money over to the experts who levy high and continuous charges while not doing a very effective job. They fight over a pie which, as represented by the FTSE 100 or any of the other world’s major indices, has barely advanced over the last decade. No wonder they are unable to keep their retirement savers happy.
The FTSE 100 is, of course, illusory.
The constituents change from year to year, and for the wrong reasons. It simply represents the largest companies by value. Companies can boost their value simply by merging with each other. Or else they can be the beneficiary of a generalised sector boom which, for instance, has carried several natural resource shares into the FTSE index right at the top of the cycle. In order to limit management costs, many investors buy index funds which, because of the factors I have just mentioned, have little chance of delivering good returns.
Understandably disillusioned by poor returns and high management charges, many opt to do it for themselves. This brings a whole new set of problems. Many seem to think that the stock market is a casino, that to make money in shares you need, above all, luck, and they shy away at the first experience of failure.
But the stock market is like a fruit and vegetable market. All sorts of goods are on offer. Some are tasty and attractive. Others are rotten and unappealing. You would no more go to the fruit and vegetable market and simply buy the first things that came to hand, or unthinkingly follow the advice of the stall holder.
A proven system for finding great stocks
It is important to remember you do not ‘invest in the stock market’. You invest in companies that happen to have their shares quoted on the stock market and there is a world of difference.
The secret of successful investing is to identify good companies. When individual shares perform spectacularly well over a period of many years, it is not through luck. It is because the company has a great product. It has little serious competition, and it can set prices that give it a good profit. It quickly creates revenue, profit and surplus cash flow. And it has an identifiable opportunity to reinvest these profits in order to make more in the future.
Only a handful of companies – Xaar (XAR) and Oxford Instruments (OXIG) to name but two – have these specifications. The largest companies – think banks and utilities – tend to be locked into fierce price competition with little scope for revenue growth. At the other end are small companies that have an exciting idea that can pay off handsomely, but are as yet unproven. Direct investment into successful companies is the best way to bear the retirement blues.