5 ways investing in the stock market can supercharge your savings

Why are we sitting on our nest eggs instead of growing them? Here are five reasons you should consider investing in the stock market instead.

Australian retirees have a reputation for spending less than their savings allow. According to the ATO, the average Australian SMSF member holds 30 per cent of their savings in cash, compared to 9 per cent in some low-cost managed funds.

Cash seems like a safe option because it’s liquid, which means you can draw on it at the drop of a hat.

However, the reality is that we are probably holding too much of our savings in cash, and considering inflation is at 2.5 per cent and that interest rates are at historic lows, we’d be lucky to be standing still and not moving backwards in terms of what we have to spend in real terms.

If our goal is to earn not burn, why are we sitting on our nest eggs instead of growing them?

Natural caution

Those of us whose parents lived through the Depression in the 1930s know very well how a scorching experience early in life sets a pattern that carries on for decades. You might not re-use teabags and recycle Christmas wrapping paper but that was their attitude because they remembered times when things like that made a difference.

In the investment market they say ‘Cash is King’ because canny investors with spare cash can pick up bargains, and that’s a big plus, but you have to be prepared to let go, and open your wallet when opportunity knocks.

Risk versus safety net

If your car finally ‘blows up’ irreparably, or an unexpected medical bill hits, or a family member gets into difficulties and needs rescuing. That’s life. And we want to be able to draw on our savings quickly when the need arises.

The problem with this approach of course is figuring out how much you really need and how you can make the cash that just sits there work for you. I have one canny friend who still keeps a small mortgage going, rather than paying it off, so he can use the line of credit, the offset, that comes with that account, if trouble strikes. It is a clever idea because you don’t pay interest on money you haven’t had to borrow.

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The alternatives don’t look that inviting right now

Property is starting to look patchy, and fixed interest investments like government bonds are down there with bank term deposits in terms of how much they’re paying. Balancing risk and income isn’t easy with interest rates at historic lows, particularly for those of us who want to make our savings work for us by generating income.

So, why should you invest your savings in shares?

It’s a juggling act, but it makes sense to think carefully about how much you have in cash and how much ‘just in case’ savings you actually need.

Over the long haul, shares are actually one of the best investments you can make because they offer both capital gains as their prices rise, as well as dividends. So while it’s important to have an emergency fund, it’s also important to make your money work for you.

American investment guru Warren Buffett always says the best time to buy is when other people are selling

Here are 5 reasons why the stock market can be the best place to do that:

  1. Companies that pay tax in Australia offer fully franked dividends, which for retirees can often deliver close to 10 per cent returns a year because of the tax rules.

  2. If you’re a long term holder, the daily lurches in the market don’t matter as long as the dividends keep coming. And for all the recent talk about changing the tax laws, franking ensures that company profits aren’t double taxed when they are paid out as dividends, so it’s unlikely to that franking will be abolished. That said, there is a risk that the government reverts to pre-2000 rules when franking credits were not refundable. This would have a significant impact on self-managed super funds in pension mode, which currently receive cash back from the ATO for the amount of franking tax paid on the dividend.

  3. Even a return of 6 or 7 per cent a year, with 30% tax already paid, is a lot more exciting than watching your bank balance failing to keep pace with inflation.

  4. Investing in the stock market isn’t rocket science, and there is something for everyone. It’s important to keep returns and a risk profile in mind when thinking about where best to invest to meet your returns goals: whether it’s Exchange Traded Funds, stocks, or Initial Public Offerings (or IPOs).

  5. Sometimes you find opportunities in places you don’t expect. For example, the ASX All Ords was down 4.5 per cent last year, the top 50 stocks on ASX lost 1.3 per cent and household names like BHP Billiton and NAB were down 33 and 9 per cent, respectively. Meanwhile, the 93 companies that listed on ASX last year returned 22 per cent – a stellar performance.

However, a drop in share prices isn’t something to fear either. In fact, it is exactly what canny investors want to see when they are thinking of increasing their holdings. American investment guru Warren Buffett always says the best time to buy is when other people are selling, and vice versa, and he’s right a lot more often than he is wrong.

What questions do you have about investing in the stock market? Join the conversation below.