Why You Need to Invest
Saving money in a cash account loses value over time because of inflation. Investing is how you grow your wealth so that it outpaces inflation. Historically, a globally diversified stock market portfolio has returned around 7–10% per year before inflation.
Core Investment Concepts
- Compound returns — Earnings on your earnings. £10,000 at 7%/year becomes £76,000 in 30 years without adding a penny.
- Risk vs reward — Higher potential returns come with higher short-term volatility. Time in the market smooths this out.
- Diversification — Spreading investments across many assets reduces the impact of any single one falling.
- Asset allocation — The mix of stocks, bonds, and cash that matches your risk tolerance and time horizon.
Main Asset Classes
- Stocks/Equities — Ownership in companies. Highest long-term return, most volatile short-term.
- Bonds — Loans to governments or companies. Lower return, more stable.
- Index Funds / ETFs — Funds that track a whole market index (e.g. S&P 500). Low cost, automatically diversified.
- Property — Real estate as an investment. High barrier to entry but strong long-term returns.
- Cash — Low risk, low return. Good for short-term goals only.
Getting Started: The Simple Path
- Pay off high-interest debt first
- Max out any employer pension contributions (free money)
- Open a Stocks & Shares ISA (UK) or Roth IRA (US) for tax-efficient investing
- Invest in a low-cost global index fund (e.g. Vanguard LifeStrategy or a global ETF)
- Set up automatic monthly investments and don’t look at it every day
Common Investing Mistakes to Avoid
- Trying to time the market
- Selling during market downturns
- Paying high management fees (1%+ per year compounds horribly over decades)
- Putting all your money in one company or sector
- Investing money you might need within the next 5 years