The only reason you need to invest is this: The cash sitting in your bank account is continuously losing value every day.
I must admit, it took me a long time to realise how much of a burning platform this is.
As I'm writing this, the UK Gov website tells me that inflation has made everything 8% more expensive in the last 12 months. Since the cash in my bank account isn't inflating, my purchasing ability has gone down ~8%. We don't need to get into the reasons behind inflation. All you really need is a way to beat inflation or, at the very least, a way to beat the 0% return you are getting from your bank account.
Where should I invest?
I'm not a position to give you an investing strategy, but an easy place to start is by investing in "index funds".
Index funds make your life simple by letting you buy a bit of everything. This is typically a good long-term medium-risk, medium-return strategy because you are effectively investing in the whole stock market, and the stock market as a whole will typically go up in the long-term.
When you buy 1 share of an index fund such as the "S&P 500", your investment is split across lots of different companies. This means a change in a single company's value won't affect you too strongly. In other words, you are spreading your risk.
How much will I earn?
As an example, if you invested £100 in the "S&P 500" 10 years ago, it would now be worth ~£400 (source) at a return of ~14% every year.
In the same time period, goods costing £100 would now cost ~£125 (source 1, source 2).
That means you would have beaten inflation by an order of magnitude.
Can I lose money?
Yes. There is always a risk in investing, and an index fund can also go down. However, investing in an index fund is a great way of spreading the risk, because it's effectively tracking the whole market which in general trends upwards.
You can see below in the tracker for S&P 500 that there are 3 noticeable dips: the dot-com bubble (2000), the great recession (2008) and the COVID recession (2020). In each case, the market recovers in a few years.
OK, so how do I actually invest?
Investing is actually dead simple. If you haven't already starting this journey, I would highly recommend taking 30 mins today to get yourself started. You can figure out the details of where to invest later.
3 steps for you to do today*:
- Find any investment platform, such as Vanguard and make an account. Here are some other examples
- Once you're in, set up an ISA, such as a Stocks and Shares ISA – this will let you invest up to £20,000 every year without paying any tax on your earnings
- Use this ISA to buy shares of anything you want. As a starter, you can try to buy 1 share of an index fund such as the S&P 500 (link to Vanguard's S&P 500 tracker)
(*) These steps are UK-specific, but some Googling will help you find the local equivalent version.
Once you've got your feet wet, you should definitely spend some time researching where to invest. For example, you can invest in specific public companies, purchase crypto-currency, or even get into real estate.
Where are you on your investing journey? I'd love to hear from you (reply to this email!)