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- Why Investing is the New Saving
If you’ve been on the public transport lately in and around London, you might have noticed adverts for investing plastered everywhere. Maybe you also heard the word thrown around and been wondering what the fuss is about.
Lots of these on the underground!
In the past, one of the main ways of saving money was to open a savings account and put your money there for a fixed period. You might have been able to get a few percent interest, but it was never something you could build wealth with.
Investing is your unfair advantage
When you hear this word, do you automatically think about gambling, picking stocks and active day trading? That’s not the type of investing we will be talking about.
We don’t want to do active trading because on average these kind of investors tend to lose money. You heard that right! Even the top Wall Street investors don’t beat the market in the long run.
🚀 Index funds do. Shhhhhh 🤫
That’s why the best way to invest is through a low cost index fund. It’s a passive fund that tracks the market index like the S&P 500, which usually comprises of stocks and bonds. It exposes you to a diverse portfolio and you can set your risk level based on the portfolio make up.
I want to stress the importance of choosing a low cost platform and setting yourself up for long term investment horizon. We won’t build wealth overnight, but this is a sure way to do it over the long term, especially if you can invest more aggressively.
The real magic happens with compounding over a longer period, where you can double or triple your original investment 🔊
Let’s say your initial investment is £1k and you add £200 every month for the next 25 years at 7% interest rate. At the end of this period, your total interest alone is almost double your initial investment!
Magic!
Where to do it and how
There are a few platforms in the UK such as Vanguard, Hargreaves Lansdown, Nutmeg (probably one of the most user friendly and great for beginners), Bestinvest as well as some high street banks.
For my international friends 🌎, I would look for investment platforms that offer similar funds to those provided by the above.
The most tax efficient way to invest is through a Stocks and Shares ISA, which you can contribute up to £20,000 per tax year. Any interest earned in this account would be free from UK income tax or capital gains tax.
It’s fairly easy to start investing with as little as £50 or £100 per month. However, general advice is to aim for 10% or more of your take home pay. Pick your investment strategy, risk level and set up automatic monthly payments.
Watch your money grow 🪴
And no, you don’t need no fancy advisor or wealth manager managing the investments for you for a ‘small’ 1% fee, which over the years can reduce your returns by up to 28%. You can absolutely do it yourself.
What are the potential returns?
The average stock market return is about 10% per year for nearly the last century, as measured by the S&P 500 index. In some years, the market returns more than that, and in other years it returns less.
You can see the S&P 500 last ten year performance above - it is not a risk free investment after all and investments can go up and down, especially in the short term. However, if you’re in it for the long run (at least 5 years or more), the returns do balance out.
For projection, I personally use 7% or 8% to calculate average returns, which takes into account inflation of 2-3%.
Over the years this can really add up, so start investing now 💸
I will be deep diving into more investment related topics in the future, but if you have any burning questions, do drop me an email.
My weekly recommendation
One of the best books I’ve read about money is The Psychology of Money by Morgan Housel. He talks about how emotions and learnt behaviours can influence our money decisions, often negatively.
There is a quote in the book that stood out for me on how wealth is truly invisible. Those who often flash expensive things and lifestyles may not be wealthy at all and living pay check to pay check.
“Wealth is what you don’t see — the cars not purchased, the cash not spent, the investments not made.”
This book did really solidify how I feel about money now. I will probably read it again soon, that’s how good it is. If you’d rather listen than read, there is an audiobook and Morgan has recently guested on a lot of podcasts too.
Could you do me a favour please? If you enjoyed the newsletter and found it useful, can you forward it to 3 of your friends?
Until next time 👋
Lina at Money Blues
Dislaimer. Capital at Risk. All investments carry a varying degree of risk and it’s important you understand the nature of the risks involved. The value of your investments can go down as well as up and you may get back less than you put in.
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