The idea of getting rich slowly doesn’t offer much of a wow factor — but it is one that pays. Investing over the long term has helped millions to grow their wealth for a secure financial future.
Historic data clearly shows that, over time, investing will make you more money than stashing savings in a bank or building society account. Yet savers have an estimated £610 billion sitting in cash that could be working much harder for them if it was invested, according to Barclays.
That’s the reasoning behind the Invest for the Future campaign that was launched this week by the government, working with leading financial firms.
Investing is tried and tested. The Barclays Equity Gilt Study of market performance over decades shows that stocks have historically and consistently outperformed cash over the long term. US equities have delivered average returns of 6.8 per cent a year over the past 50 years, while UK stocks have returned 5.4 per cent. Cash, meanwhile, returned an average of 0.7 per cent.
Investors make money as the value of their holdings increases, and can also earn dividends — profits that some companies pay out to shareholders each year. These can be reinvested into more shares, boosting the value of your money further.
Malcolm Steel from the advice firm Mearns & Company said: “A long-term, patient approach is essential because this unlocks the magic of compound growth — effectively growth on top of growth. Add reinvestment of dividends to this and spectacular results can be achieved.”
How the money grows
The investment platform Hargreaves Lansdown said that if you had put £1,000 in a savings account five years ago, earning the average interest rate it would now be worth £1,180. From ten years of growth it would be £1,205, from 20 years it would be £1,439 and if you had invested it three decades ago, it would now be worth £2,430.
If that £1,000 had been invested in the global index MSCI All Country World Index five years ago, it would now be worth £1,521 — £1,684 if you had reinvested your dividends. If you had invested 10 years ago it would be £2,679 (£3,350 after dividends). If you invested 20 years ago you would have £3,904 (£6,357) and if you had invested in 1996, you would now have £6,007 (£11,779).
Steel said: “In a nutshell, if you’re not investing, you’re missing out on important growth.”
Where to begin
British savers have a love affair with the cash Isa, and many say that they see stock market investing as risky whereas in the US, for example, investing is far more commonplace.
The US Securities & Exchange Commission reported that 58 per cent of US households held stocks in 2022. That compares with about 21 per cent of UK adults, according to the Financial Conduct Authority, the City regulator.
Some four million people invested in a stocks and shares Isa in the 2023-24 tax year. The Times Smarter with Money is campaigning to boost this to more than five million a year.
Stocks and shares Isas offer a tax-efficient way of investing up to £20,000 a year — your money and profits will be sheltered from capital gains, dividend tax and income tax.
You can set up a stocks and shares Isa or general investment account (if you have maxed out your Isa allowance) in a few minutes using online investment platforms such as AJ Bell, Hargreaves Lansdown, Interactive Investor or Fidelity. You invest as little as £25 a month, or start off with a lump sum.
Once you have decided what you can afford to put away, you will need to select your investments. You can go for shares in companies or spread your risk by buying into a pooled investment fund that holds a basket of shares and assets. You can get actively managed funds run by human stockpickers or cheaper trackers that choose investments using computer algorithms.
A standard tracker or exchange traded fund (ETF) replicates the holdings and therefore performance of a market sector or index, such as the FTSE 100 or S&P 500.
Your choice may be influenced by the countries or sectors that you think have the best chance of growing your money. There’s no hard and fast rule on what to invest in, aside from making sure that you have a good balance in your choices — known as diversification. That means not ploughing everything into one area that interests you. The idea is that if one investment does badly then others that are doing well can balance out any losses.
Sarah Coles from the investment platform AJ Bell said: “There are no set rules as to how many different funds or shares you need, but the key is balance. You want to spread the risk in a way that makes you feel comfortable, without building such an array in the early days that you pay more fees than you need to.”
Don’t be afraid to be boring
A typical approach is to invest broadly in key regions — the UK, US and Europe — and then add a little bit of personalisation with smaller investments in more specific areas, such as space exploration, defence technology, robotics or AI infrastructure, for example. Some ETFs track the price of commodities, such as physical gold, oil and copper.
If the choice is too overwhelming, you can go for one of the ready-made portfolios offered by many platforms. These oven-ready options are usually made up of tracker funds, and you choose them according to the level of risk that you are prepared to take on.
The good news is that patience and a hands-off approach can really pay off. Steel said: “Good investing is often very boring — buy shares in great companies, or an index or well managed mutual funds, and then do nothing more. The temptation to tinker with investments can be strong, but often a buy and hold strategy delivers superior longer-term results”
Need extra help?
You don’t have to go it alone when it comes to investing. You may be contacted by your bank to discuss investing. Financial firms have been given the green light by the Financial Conduct Authority, the City watchdog, to offer “targeted support,” which is a new form of regulated, affordable financial advice.
You could also speak to a financial adviser either through a recommendation from a friend or family member, or by searching on websites such as vouchedfor.co.uk. An adviser will charge for their time, but this can be an investment in itself if it helps to get you started.
Steel said: “Whatever you do, don’t do nothing with your money. Support and advice is valuable, especially for first-time investors and those who don’t feel that they have the confidence, knowledge or experience to do it themselves.”
