It is not enough to leave money on deposit in the bank, because even the best savings accounts pay only one or two percent, while inflation is expected to exceed eight percent in April. But investing can help your money retain its value as consumer prices rise. Especially if you do this simple trick, which will boost your returns.
The state pension is falling in real terms, as it only increased by 3.1% in April, but inflation is expected to reach 10% this year.
Everyone should try to save on their own if they can, either through a personal pension or through their tax-free £20,000 Isa allowance.
The stock market has been bumpy lately, but should still generate a much higher return on cash over the long term.
This simple tip will help you get the most out of investing, so you can even make money when stock prices are stable.
Most ordinary people who invest in a pension or in stocks and shares put their money in an allocation of investment funds.
These reduce risk by buying dozens of different companies to reduce the damage if one or two fail.
Many of these companies will pay dividends to shareholders as a reward for holding their shares. Your fund manager will pass these on to you, in addition to any capital growth as their stock prices rise.
Now here is the trick.
Your fund manager or investment platform will give you the choice of taking these dividends as income or reinvesting them in your portfolio.
If you are still working and building for wealth or retirement, you should almost certainly REINVEST them.
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If you do this, your reinvested dividends will buy more shares, which will boost your total return. It’s a simple tick box exercise, but you need to get the answer right because it will make a huge difference overall to your total return.
At the time of writing, the FTSE 100 is trading at 7,544. Incredibly, this is only 614 points higher than on December 31, 1999, over 22 years ago.
On that date, the FTSE 100 closed at 6,930. It is trading just 8.89% higher today. However, if you had invested £10,000 in 1999, your money would have more than doubled to £23,700 today.
You will have achieved a total return of 137%, according to AJ Bell.
How is it possible? Through the power of reinvested dividends.
They would have continued to buy more stocks over the past two decades, at prices much lower than they are today.
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In March 2000, global stock markets crashed after the end of the dot-com stock market boom and took several years to recover. They crashed again after the terrorist attacks of September 11, 2001, the financial crisis in 2008 and the Covid 2020 pandemic.
Your reinvested dividends would have automatically bought shares at a discount at every opportunity, and your pension or Isa would have reaped the benefit.
Laith Khalaf, head of investment analysis at AJ Bell, said reinvesting dividends turns stock market volatility in your favor. “You actually benefit if stocks fall because your reinvested dividends pick up more stocks at a lower price.”
The longer your investment period, the greater the benefits, said Lee Wild, head of equity strategy at Interactive Investor. “Between January 1, 1986 and March 31, 2022, the FTSE 100 generated a total return of over 2,010%.”
That would have turned £10,000 into a staggering £211,000, but again, only if you had reinvested all your dividends.
When you retire, you can then tick another box indicating that you now wish to receive your dividends as income.
Then you can use those regular shareholder payouts to boost your state pension income and fund a better retirement.