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Investing in the stock market is a powerful way to build long-term wealth. But in the UK, we don’t do enough of it. Only 23% of Brits invest in shares (outside of their pensions), compared to 61% of Americans. That’s a depressing transatlantic divide.
It’s brilliant to see that stocks were recently covered in The Martin Lewis Money Show for the first time. The personal finance guru is performing an important public service by raising awareness about the compound returns the stock market can deliver.
Martin Lewis focused on index funds that track the likes of the FTSE 100, FTSE 250, and S&P 500. It’s a good place to start, but investors with sufficient risk tolerance could consider going further by adopting a Foolish approach.
The merits of index funds
Investing in tracker funds has a strong appeal. It’s a passive way to diversify across businesses in different sectors.
The case for long-term stock market exposure is compelling. As Martin Lewis highlighted, over time, cash loses its real value to the corrosive effects of inflation. Over the past 10 years, that’s true even for those who chased the highest interest rates on savings accounts, switching between banks regularly.
Conversely, index funds tend to grow in real terms over long time periods. In the past decade, the FTSE 100 delivered a 6% annualised return. For the S&P 500, it’s a remarkable 13.6%. Both comfortably beat UK inflation, delivering real growth.
That’s not to say there aren’t risks. Stock market volatility means index funds aren’t suitable investments for short-term goals or rainy-day savings. And crashes can be brutal, as the â44.8% return for the FTSE 100 in 2008 shows.
But for patient investors with long-term objectives and the steely resolve required to avoid selling during difficult times, I think the stock market has a lot to offer.
Furthermore, the Cash ISA allowance is being reduced to £12,000 for under-65s, but the Stocks and Shares ISA limit will remain at £20,000. For those with sizeable savings, that’s another good reason to consider stocks.
Turbocharging a stock market portfolio
Buying individual shares is something Martin Lewis didn’t touch on. This requires more research than index fund investing, and it’s undoubtedly a riskier strategy.
However, fortune often favours the brave. Take the example of Rolls-Royce (LSE:RR.) — a FTSE 100 stock I own.
Rolls-Royce shares have surged 861% over five years, delivering the sort of return that no index fund can. And I don’t think it’s too late to consider buying the stock today either.
The civil aerospace division — the company’s largest — is firing on all cylinders. A strong post-Covid recovery in international travel and a new joint venture with Air China in Beijing suggest 2026 could bring further success.
NATO’s militarisation drive in the face of Russian aggression bodes well for the defence business. Rolls-Royce has signed lucrative contracts in recent months to deliver engines for Leopard 2 battle tanks and Eurofighter Typhoon aircraft.
And the group’s small modular nuclear reactors also show tremendous potential. Rolls-Royce is well-positioned to capitalise on growing demand for reliable power for datacentres and critical infrastructure.
Granted, a forward price-to-earnings (P/E) ratio above 35 means the stock isn’t cheap, raising the risks of potential sell-offs. But I’m optimistic Rolls-Royce can continue to supercharge my portfolio’s performance next year and beyond.
The post New to investing in the stock market? Here’s how to try to beat the Martin Lewis method! appeared first on The Motley Fool UK.
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Charlie Carman has positions in Rolls-Royce Plc. The Motley Fool UK has recommended Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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