Always remember that investments can go down as well as up in value, so you could get back less than you put in. A rule of thumb is to hang on to your investments for at least five years to give them the best chance of providing the returns you are hoping for.

Investing in the UK (in your 20s and 30s)

Updated On: Jul 13, 2022
Investing in the UK

Contents:

What most 20-somethings don’t understand about investing

When the pandemic peaked in 2020 and the world went into lockdown, the internet was rife with people talking about making loads of money from the stock market, which led many young people to begin pumping their savings into stocks and crypto in the hopes of becoming millionaires. 

It didn’t take long for most of them to realise that it was only a pipe dream and you couldn’t become a millionaire overnight from investing £100 into an ISA.

Instead, you find yourself spending a significant amount of time researching companies and trying to predict the best time to buy stocks, only to end up with a negative portfolio or ridiculously low returns.

The fact about investing is, if your capital is small, the money you make from investments will also be small.

The average 22 to 39-year-old living in the UK earns about £30,000 a year. If they adopt the 50-30-20 budgeting rule, which suggests putting 20% of your net income towards savings, investments and extra debt, the average person will invest just about 7% of their net income.

£30,000 after tax and national insurance contributions comes to about £24,000 a year. 7% of £24,000 is just £1,680. Even if you put that into a high-risk investment offering about 20% a year, your total return from investing would be £336 in one year! You could easily have made that from picking up a few shifts at McDonald’s, riding for Deliveroo or working overtime one weekend (if you have an okay-paying job).

Don’t get us wrong; we are not advocating against investing. Quite the opposite actually, we think you should invest. It’s just important to understand that pumping your savings into stocks and crypto isn’t going to make you a millionaire. Spending long hours researching the stock market only to earn a 10 - 20% return best case scenario is most likely a waste of your time. It would be much more profitable to invest your time getting better at your job, finding a side hustle or starting a business.

Look at it this way: if we assume a 10% average annual return,

  • to make £10,000 a year from investments, you need at least £100,000 invested;
  • to make £30,000 (average salary) a year from investments, you need at least £300,000 invested.

With £300,000 invested, you might be able to quit your job, focus on stock and crypto trading full time, and earn enough money from your investments to live a comfortable life.

However, if you are a normal young person without a £300,000 investment portfolio, we think the sensible way to invest is through something we call a Four-Fund Portfolio strategy. We use this strategy to make the most of our savings and investments. It did not make us rich overnight, but it has ensured that we invest our money in the most sensible way possible.

To summarise, the TL; DR

What most 20-somethings don’t understand about investing:

  1. Stock picking is for rich kids.
  2. If your capital is small, the money you make from investments will also be small.
  3. You will make a lot more money if you invest your time getting better at your job, finding a side hustle, or starting a business.

Please remember that when you invest money, your capital is at risk. We are not financial advisers, so please do not take anything we write here as financial advice.

How to invest in your 20s and 30s

People always ask us what beginners should invest in. While we cannot tell you what to invest in, we can certainly tell you what we invest in.

At Koody, we invest our personal funds (and some of Koody’s money) using a strategy we call the Four-Fund Portfolio, an adaptation of Boglehead’s Three-Fund Portfolio, which originated in the US.

The Four-Fund Portfolio is a really simple passive investing strategy that involves investing in three types of index funds or ETFs with a long term horizon of at least 20 years and one extra fund with a short to medium-term horizon of one to five years.

Instead of trying to time the market, spending many long hours researching companies or getting stressed out when the value of our stocks take a hit, we regularly invest into four funds and spend our free time doing more productive things, like working.

Here’s what we mean:

The Four-Fund Portfolio

An index fund is a passive investment that seeks to track a particular market index. This simply means that when you buy one index fund, you’ve invested in all the companies listed on an index. So if you purchased a FTSE 100 index fund, you’d have invested in the 100 companies with the highest market capitalisation on the London Stock Exchange. Similarly, if you bought a FTSE All Share index fund, you’d have invested in all the companies listed on the London Stock Exchange that pass the screening for size and liquidity.

An exchange-traded fund or ETF is an index fund that can be traded on the stock exchange like a share.

Here’s how we invest at Koody:

Fund 1: Domestic

Here, we buy an index fund or ETF that tracks the local UK market, i.e. a fund that tracks the FTSE UK All Share Index. This fund invests in all eligible companies listed on the London Stock Exchange’s main market, which pass the screening for size and liquidity.

Examples of this index fund include:

  • Vanguard FTSE UK All Share Index Unit Trust.
  • HSBC FTSE All Share Index C.

Examples of this ETF include:

  • SPDR FTSE UK All Share (FTAL).
  • SPDR FTSE UK All Share UCITS ETF (FTAD).

What we invest in: We invest in the Vanguard FTSE UK All Share Index Unit Trust (Accumulation).

Where to buy: Interactive Investor, Hargreaves Lansdown, AJ Bell Youinvest, Vanguard or InvestEngine (ETFs only).

You can choose to buy the funds with either “Income” or “Accumulation” classes depending on whether you want to receive or reinvest your dividend. Income means you will receive regular dividends, while Accumulation means your dividends will be automatically reinvested (increasing the size of your portfolio).

Fund 2: International

Here, we buy either a global (developed world + emerging markets) or US total market index fund or ETF.

Examples of this index fund include:

  • Vanguard FTSE Developed World ex-UK Equity Index Fund - tracks the FTSE Developed ex-UK Index (large and mid-sized company shares in developed markets, excluding the UK).
  • Vanguard US Equity Index Fund - tracks the Standard and Poor’s Total Market Index (large, mid, small and micro-sized company shares in the US).
  • HSBC FTSE All World Index Fund - tracks the FTSE All-World Index (large and medium-sized companies in developed and emerging markets).

Examples of this ETF include:

  • Vanguard S&P 500 UCITS ETF (VUSA) - tracks the Standard and Poor’s 500 Index (large-sized company stocks in the US).
  • Vanguard FTSE Developed World UCITS ETF (VEVE or VHVG) - tracks the FTSE Developed Index (large and mid-sized company stocks in developed markets).
  • iShares MSCI All Country World Index (SSAC) - tracks the MSCI All Country World Index (large and mid-cap stocks from 23 developed and 27 emerging markets worldwide).

What we invest in: We invest in the S&P 500 UCITS ETF (VUSA), which tracks the performance of the 500 largest companies listed on stock exchanges in the United States.

Where to buy: Interactive Investor, Hargreaves Lansdown, AJ Bell Youinvest, Vanguard or InvestEngine (ETFs only).

Every year, we invest our first £20,000 into an individual savings account or ISA. We do this because ISAs are tax-free. When you hold investments or savings in an ISA, you never (ever) pay tax on the gains you make on those investments or savings. Even in future years when you’ve accumulated hundreds of thousands of pounds in your ISA, you still wouldn’t pay taxes. Pensions are tax-free too, but you can’t withdraw your money until you turn 55 (increases to 57 in 2028).

Fund 3: Bonds

Here, we buy an index fund that tracks the performance of UK government bond indexes such as the Bloomberg U.K. Government Inflation-Linked Float Adjusted Bond Index. The index includes UK government inflation-linked bonds with maturities greater than one year. Inflation-index-linked bonds can help to hedge against inflation risk because they increase in value during inflationary periods.

Examples of this index fund include:

  • UK Government Bond Index Fund - tracks UK government bonds with maturities greater than one year.
  • UK Inflation-Linked Gilt Index Fund - tracks UK government inflation-linked bonds with maturities greater than one year.
  • UK Long Duration Gilt Index Fund - tracks UK government bonds with maturities greater than 15 years.

Examples of this ETF include:

  • UK Gilt UCITS ETF (VGOV) - tracks UK gilts denominated in UK pounds sterling with maturities greater than one year.
  • iShares £ Index-Lnkd Gilts ETF (INXG) - tracks UK domestic government inflation index-linked bonds.
  • SPDR Blmbrg 15+ Yr Gilt ETF (GLTL) - tracks the Bloomberg Sterling 15+ Year Aggregate Gilts Bond Index.

What we invest in: We invest in the UK Inflation-Linked Gilt Index Fund (Accumulation), which tracks UK government inflation-linked bonds with maturities greater than one year.

Where to buy: Interactive Investor, Hargreaves Lansdown, AJ Bell Youinvest, Vanguard or InvestEngine (ETFs only).

When you invest in a government bond or gilt, you are lending money to a government in return for interest. Another name for a UK government bond is Gilt.

Fund 4 (Extra and Optional): Crypto, NFTs, rare art, crowdfunding, collectibles, luxury watches, vintage cars, physical gold and wine.

Now, we know that no matter what we say here, 20 and 30-year-olds would still pick stocks and try to time the market. That’s why we created Fund 4.

Fund 4 is where we pick stocks and crypto and build a portfolio of interesting things. As a general rule, we never invest more than 3% of our entire portfolio into Fund 4. Matter of factly, when we put money into Fund 4, our assumption is that the money is gone forever. Sometimes we make a decent return on it, but very often, we do not.

Fund 4 is what we call a FOMO fund. Where FOMO = Fear Of Missing Out.

Here we allocate 3% of our portfolio to things like cryptocurrencies, NFTs, rare art, crowdfunding, collectibles, luxury watches, vintage cars, physical gold and wine.

Here are a few of the constituents of our Fund 4 portfolio:

  • Cryptocurrencies (Bitcoin, Ethereum, USD Coin, Tether, Terra, XRP, BNB, Solana, Cardano and Axie Infinity)
  • NFTs
  • Crowdfunding campaigns

To learn more about investing in cryptocurrencies, click here, and here for NFTs

Another way to invest money apart from the stock market is physical real estate. You can invest in real estate to earn rental income and to sell your property when the value appreciates.

PSA: If this is all too confusing for you and you would rather chat with someone on our team, send an email to hello@koody.co with the subject, Investing in the UK (in your 20s and 30s).

Alternatively, you can sign up for a robo advisor. Robo advisors are technology companies that provide automated financial planning with little or no human supervision. Their products include ready-made investment portfolios, managed investments and financial advice.

Robo advisors are excellent for beginner investors or those who do not want to deal with the hassle of choosing individual stocks, bonds and other investments. You can compare some of the best robo advisors in the UK here.

Why we invest this way

Diversification

By investing in Funds 1, 2 and 3, we’ve invested in thousands of companies across multiple industries, both home and abroad. We’ve also lent some money to the government in the hopes of earning interest.

Affordability

Index funds and ETFs are really cheap compared to other funds or investment types. All the funds we invest in each attract less than half a per cent in annual fees.

Simplicity

It is so much simpler to invest in and track the performance of three (plus one) funds than to spend hours researching companies, timing the market or investing in thousands of individual stocks.

Why we invest our first £20k into an ISA

Every year, we invest our first £20,000 into an individual savings account or ISA. We do this because ISAs are tax-free. Essentially, when you hold investments or savings in an ISA, you never (ever) pay tax on the gains you make on those investments or savings. Even in future years when you’ve accumulated hundreds of thousands of pounds in your ISA, you still wouldn’t pay taxes. Pensions are tax-free too, but you can’t withdraw your money until you turn 55 (increases to 57 in 2028).

What you must do before investing

Before you start investing, it is important to separate the money you want to invest with from your emergency fund and everyday spending pot.

Your emergency fund should equal at least three times your monthly living expenses. This will prevent you from dipping into your investments if you find yourself in a major financial crisis like a job loss or severe health problem. Try to keep your emergency fund in a high-yield, easily accessible cash savings account like a cash ISA or a standard easy-access savings account.

You also want to have an everyday spending pot so that you do not feel the urge to cash out your investments every time you need to buy groceries or hang out with friends.

More importantly, it is crucial to consider your wider financial position before investing in the stock market. This might include paying off outstanding debts, such as a credit card bill or personal loan. Suppose you have £4,000 outstanding on a credit card charging interest at 19%, it will cost you £760 a year to pay back the debt. Your investments are unlikely to match this return, so it might be wise to pay off the credit card debt and other expensive debts before investing.

Once your finances are in order, you can invest as much or as little as you feel comfortable with. Most investment platforms and robo advisors will allow you to start investing with as little as £25 a month, and some even accept £1 a month. Investing small amounts regularly is known as ‘drip-feeding’ into your investment pot, and it can sometimes be better than investing a huge lump sum once.

For more information on investing as a beginner, read our Investing for Beginners guide.

Some of the UK’s best investment platforms

When you are ready to build your investment portfolio, compare some of the UK’s best investment platforms here:

Capital at risk. ISA charges apply. Other charges apply.


Interactive Investor - One free trade per month; 40,000+ investments

Interactive Investor
Account Type
DIY & Ready-made
Dealing Fee
£7.99 - £3.99
Annual Platform Fee
£120 - £240
Minimum ISA Deposit
£25

Interactive Investor has more than 40,000 investments to choose from, including UK and overseas shares, funds, investment trusts, and ETFs. You get a free trade every month, which you can use to buy or sell any investment. It is free to top up your ISA each month, and there are no trading fees with its regular investing service. It also has several ready-made funds and expert ideas to make it easy to choose investments. Interactive Investor also offers a Trading Account, SIPP, and Junior ISA.

Capital at risk.

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InvestEngine - Low cost; 500+ Commission-free ETFs

InvestEngine Logo
Account Type
DIY & Ready-made
ETF Cost
0.15% - 0.25%
Annual Platform Fee
0% - 0.25%
Minimum ISA Deposit
£100

InvestEngine is a UK low-cost investment platform providing a choice of managed portfolios tailored to you and commission-free DIY investing to help you build long-term wealth. Users can invest in over 500 exchange-traded funds (ETFs) from iShares, Vanguard and other leading brands. With InvestEngine, you can invest in two ways depending on your investing savviness: Beginner investors or those who prefer to choose a ready-made investment portfolio can select from one of the Managed Portfolios on offer where the team of experts at InvestEngine will take care of the day-to-day investment decisions for you. These portfolios attract a platform fee of 0.25% per year. Advanced or more confident investors can choose from 500+ commission-free ETFs and build their portfolios themselves. With the DIY Portfolio, there are no platform fees. All InvestEngine portfolios are free of setup fees, dealing fees, ISA fees or withdrawal fees. InvestEngine allows you to invest via a Stocks and Shares ISA, Personal Account or Business Account.

Promo: £25 welcome bonus for new customers who invest at least £100. Terms apply.

Capital at risk.

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Bestinvest - Low cost; Lots of investment options and research

Bestinvest logo
Account Type
DIY & Ready-made
Dealing Fee
£0 (Funds)
£4.95 (Shares)
Annual Platform Fee
0.4% - 0% (DIY)
0.2% - 0% (Ready-made)
Minimum ISA Deposit
£0

Bestinvest is a UK investment platform offering about 2,500 funds, UK shares, investment trusts and ETFs. With Bestinvest, you can invest in one of two ways depending on your investing savviness: Beginner investors or those who prefer to choose a ready-made investment portfolio can build their investment pot by selecting one of Bestinvest’s ready-made investments. These investments are fully diversified and created and managed by the team at Bestinvest. Once you’ve picked one, you don’t need to do anything else. Advanced or more confident investors can choose from a wide range of funds, shares, ETFs and ITs and build their investment portfolios themselves. Bestinvest also has an investment search tool that makes it easy to browse and filter all of the investments, and you can use their free guides and articles if you need any inspiration. They are quite popular for their Spot the Dog guide which shows a list of poorly performing funds you probably want to avoid. Bestinvest’s products include a Stocks and Shares ISA, General Investment Account and SIPP.

Capital at risk.

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Hargreaves Lansdown - Lots of investment options, research and tips

Hargreaves Lansdown
Account Type
DIY & Ready-made
Dealing Fee (Online)
£0 (Funds)
£11.95 - £5.95 (Shares)
Annual Platform Fee
0.45% - 0% (Funds)
0.45% (Shares - max £45/year)
Minimum ISA Deposit
£100 lump sum or £25 per month

Kickstart your investing with an award-winning ISA. Hargreaves Lansdown has thousands of investments to choose from, including UK and overseas shares, funds, investment trusts, and ETFs. Choose your own investments with expert research and ideas to help you, or simply pick a ready-made portfolio. Manage via website, app or phone. Hargreaves Lansdown also offers a Lifetime ISA, Junior ISA, Fund and Share Account, and SIPP. These services are intended for investors happy at making their own decisions.

Capital at risk. Other charges apply.

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AJ Bell Youinvest - Mid-price range; Lots of investment options

AJ Bell Youinvest
Account Type
DIY & Ready-made
Dealing Fee (Online)
£1.50 (Funds)
£9.95 - £4.95 (Shares)
Annual Platform Fee
0.25% - 0% (Funds)
0.25% (Shares - max £3.50/month)
Minimum ISA Deposit
£500 lump sum
or £25 per month

AJ Bell Youinvest has thousands of investments to choose from, including shares, funds, investment trusts and ETFs. And you can manage them both online or through the mobile app. If you need help choosing, it has four ready-made portfolios and other investment ideas. AJ Bell Youinvest offers a Stocks and Shares ISA, Lifetime ISA, Junior ISA, Dealing Account and SIPP.

Capital at risk.

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Vanguard - Low cost; No dealing fee

Vanguard Investor'
Account Type
DIY & Ready-made
Dealing Fee
£0
Annual Platform Fee
0.15% (max £375)
Minimum ISA Deposit
£500 lump sum
or £100 per month

Vanguard is a popular low-cost investment platform with over 70 funds. You can only invest in its own funds, and it does not offer share trading. It gives you the flexibility to choose a ready-made portfolio or build your own. Vanguard's products include a SIPP, Stocks and Shares ISA and Junior ISA.

Capital at risk.

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