One of the most common questions I get on my website or here in the Koody Community is - how do I start investing in the stock market?
My answer every time includes the word ‘Vanguard’ and the phrase ‘passive index-fund investing.’
For most people, it is my belief that the most cost-effective, beneficial way to invest in the UK is to open a stocks & shares ISA on the Vanguard platform and to begin investing in low-cost, well-diversified funds that track an index such as the S&P 500 or the FTSE 100.
When it comes to becoming financially independent, we would all struggle if it weren’t for the transformative benefits of investing our money. Whilst a cash account is safe, secure and familiar – the sad truth is that due to the erosive powers of inflation, leaving money in cash over the long-term is actually losing you wealth each year as the money you have progressively loses purchasing power.
The natural alternative is to invest your money, and this can come in many different forms, whether it be equities (company shares), bonds, property, commodities or other more fancy financial contracts such as options.
You may have heard the term ‘passive investing,’ and all this really means is you invest into a fund that simply tracks an index, e.g., the FTSE 100 (the largest 100 Companies in the UK). Passive management is most common on the equity market through ‘index funds,’ which simply track the performance of an index without trying to ‘outperform’ anything, which history tells us is a very difficult thing to do.
For me, I want to invest my money in things I understand, take up almost none of my time and have a proven track record of growing in value. Specifically, I invest in Company shares via funds such as the S&P 500 UCITS ETF (VUSA) fund on the Vanguard Investor platform.
This fund tracks the S&P 500 (the largest 500 companies in the US) and contains household names such as Apple, Facebook and Google.
If you have a Company pension, chances are you are invested in stocks and shares already. Regardless, opening a stocks and shares ISA should be an immediate priority.
An ISA is an individual savings account. A stocks and shares ISA is a tax-efficient investment account that allows you to invest up to £20,000 per year into various products (e.g., company shares, investment funds, bonds, etc.) without the possibility of being taxed on your investment gains.
It’s important to note that unlike a cash ISA, in an investment account, your money can go down as well as up. For example, let’s say in your stocks and shares ISA you only invested in one company – Company X. If you invested £100 into your account and each share of Company X is valued at £5 per share, that means you have purchased 20 shares.
This Company valuation could fall to say £4 a share, at which point your invested money would only be worth £80.
This is a great example of the fluctuations associated with the stock market, but beginner investors should rest assured knowing that over time the stock market will go up in value and that these declines in value are not locked in as long as you don’t sell your position.
To avoid this problem completely, a beginner should never invest in a single company but rather invest passively in a well-diversified portfolio, i.e., into lots of different companies across various countries and industries.
Sound complicated? Believe me, once you’re up and running, it really isn’t. Once you’re set up, all you need to do is make sure your monthly direct debit goes through, and all of your investing will be taken care of for you within the platform.
Investing in company stocks can be seen as risky as your returns aren’t guaranteed, and you could get back less than you initially invested. Having said that, numerous studies (including this Barclays study) have shown that historically, holding your money in stocks outperforms cash in the vast majority of cases.
Generally speaking, people seem to overstate how risky it is to invest in stocks and shares due to the horror stories they hear on the news. The truth is, if you invest in a low-cost, well-diversified portfolio investing in stocks and shares isn’t particularly risky at all given, you are investing in the most established companies in the world.
If you use Vanguard to invest in the stock market, your investments are covered up to £85,000 by the Financial Services Compensation Scheme, should the platform become insolvent. Given Vanguard is one of the biggest names in investing, this scenario isn’t something I personally worry about, but for other less established platforms, this may be a genuine concern.
Vanguard is a very low-fee platform. Investment fees can have a ridiculously significant impact on the future value of our investments, so making sure your provider doesn’t overcharge you should be a major consideration.
Vanguard charges an annual platform fee of 0.15% of assets (capped at £375 for portfolios over £250,000), which is significantly lower than some other popular platforms in the UK, such as Hargreaves Lansdown (0.45%) or Charles Stanley Direct (0.35%).
As well as a platform fee, investors have to pay an ongoing charge for the specific funds they invest in. Vanguard offers access to a wide array of cheap funds, with the cheapest fund offering an ongoing charge of just 0.06% of assets or £6 on a £10,000 investment.
Unlike some platforms which are convoluted and difficult to use, Vanguard investor is user-friendly and simple. If you’re the type of person who can see yourself getting overwhelmed or confused when it comes to investing, Vanguard investor is probably a good option simply due to how easy it is to set-up and operate.
When it comes to investing, it sounds a lot more complicated than it is. Once you have set-up your Vanguard account, which should take as little as 15 minutes, investing can simply be boiled down to transferring a monthly amount from your bank into a low-cost, index fund of your choice that matches your risk appetite and leaving it to grow over the long-term.
Whilst I can’t tell you what returns your investments will return (nor can anybody else), I am confident in my prediction that by investing my money into the stock market within Vanguard, I will build my wealth to a far greater level than would have been possible had I left my money in cash.
Start today, and your future self will thank you.
If you’ve enjoyed this article, please check out my other writing in the following places:
Website – TheProgressionPlaybook.com
Twitter - @FI_Playbook
Or in the Koody Community, where I am an active member.
Every month, we’ll send you The Plug - a curation of the best personal finance content in the UK. We share real-life stories, how-to guides, top personal finance news, popular community questions, and tips to help you stay on top of your money.