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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 want.
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Contents:
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 that 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 by 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,
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:
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.
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 takes a hit, we regularly invest in four funds and spend our free time doing more productive things, like working.
Here’s what we mean:
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:
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:
Examples of this ETF include:
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, 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).
Here, we buy either a global (developed world + emerging markets) or US total market index fund or ETF.
Examples of this index fund include:
Examples of this ETF include:
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, Vanguard or InvestEngine (ETFs only).
Every year, 20 and 30-year-olds in the UK should look to invest their first £20,000 into an individual savings account or ISA. You should 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. 20 and 30-year-olds investing in the UK should also consider Pensions. Pensions are tax-free, too, but you can’t withdraw your money until you turn 55 (increases to 57 in 2028).
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:
Examples of this ETF include:
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, 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.
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 2% of our entire portfolio into Fund 4. As a matter of fact, 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 2% 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:
Click the following link to learn more about investing in cryptocurrencies and this link 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, How to Invest 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.
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.
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.
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.
The best way to invest £20k in the UK is to implement a low-cost passive investing strategy, which focuses on simplicity, cost-effectiveness, and diversification while taking advantage of tax-efficient investment accounts such as ISAs and pensions.
This strategy is ideal for young investors who want to build wealth over time without the hassle of constantly monitoring and managing their investments. A key aspect of this strategy is to maximise the use of tax wrappers, such as Individual Savings Accounts (ISAs) and pensions, which provide significant tax advantages for long-term investors and help maximise your investments.
ISAs, for example, offer tax-free growth on investments held within them, allowing you to avoid paying taxes on capital gains and dividends. Pensions, on the other hand, offer tax relief on contributions, which means that your money grows tax-free until you start withdrawing it in retirement. Utilising these tax wrappers in conjunction with a passive investing strategy can help you maximise your investment returns and achieve your financial goals more effectively.
Before you start investing, it is important to separate the money you want to invest 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.
We’ve compiled a list of the best places to invest in your 20s and 30s in the UK. These are some of the UK’s best investment platforms for young adults.
Please remember that when you invest, your capital is at risk. ISA, pension, and tax rules also apply.
Here are the best places to invest in your 20s and 30s in the UK:
Earn up to 5.3% annual interest on uninvested cash
eToro is a multi-asset investment platform that offers both investing in stocks and cryptoassets, as well as trading CFDs. With eToro, UK traders have real-time access to thousands of stocks, ETFs, indices, commodities, forex, cryptocurrencies, and NFTs from top exchanges worldwide. Catering to beginners and expert traders, eToro provides an impressive range of fundamental and technical analysis tools, including market news, economic data, social media trends, news sentiment trends, and advanced charting tools.
If you are new to investing or prefer a more hands-off approach, eToro has over 40 fully allocated, balanced investment portfolios, focusing on market segments you can understand and relate to. Some of the portfolios include MetaverseLife, BigTech, GoldWorldWide, Vaccine-Med, BitcoinWorldWide, Diabetes-Med, Driverless, and GigEconomy. These portfolios are a grouping of several assets, such as stocks, cryptocurrencies, ETFs, and even people, bundled together based on a predetermined theme or strategy. eToro also offers Copy Trading, which allows everyday investors to copy the trades or investments of top-performing traders on the eToro platform. Anyone can copy trades on eToro, and, in the same way, anyone can give others access to copy their trades.
It is entirely free to open an account with eToro, and all registered users receive a US$100,000 demo account for free, which you can use to practise trading or investing until you become confident. Trading on eToro occurs in USD, so a currency conversion fee will apply if you deposit or withdraw in a currency other than USD. Withdrawals incur a fee of US$5 (£4), and the minimum withdrawal amount is US$30 (£24). For UK customers, eToro offers an eToro Money app which allows you to convert your GBP to USD free of charge, thereby reducing your foreign exchange costs. eToro does not offer an ISA or SIPP.
Please note: Your capital is at risk. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money. Additionally, cryptoassets are high-risk investments, and you should not expect to be protected if something goes wrong. Tax on profits may apply. Copy Trading does not amount to investment advice. Other fees apply. For more information, visit eToro.
AJ Bell is one of the UK’s largest online investment platforms, and its mission is to make investing as easy as possible for anyone. The platform offers thousands of investment options for the DIY investor, including shares, funds, bonds, investment trusts, ETFs, ETCs, and warrants.
There are multiple ways to get started with AJ Bell, depending on your risk tolerance and investing savviness. Beginner investors or those who prefer to choose a ready-made investment portfolio can get a little, or a lot, of help from AJ Bell’s specialists by selecting one of the investment ideas on offer. Investment ideas are diversified ready-made baskets of investments that you can select based on your personal preference and attitude to risk. There are eight total investment ideas, each built by a specialist team, and you can pick the right one for you depending on whether you are seeking to simply grow your money over time or receive an income whilst still growing your money. Expert investors can take advantage of the stock and fund screeners and complex instruments available on AJ Bell and build their portfolios themselves.
AJ Bell charges an annual platform fee ranging from 0.25% to 0%, depending on the size of your portfolio. Dealing fees for buying and selling investments online are £1.50 for funds and £5 for shares (reducing to £3.50 if there were 10 or more online share deals in the previous month). AJ Bell’s products include a Share Dealing Account, Stocks and Shares ISA, Junior Stocks and Shares ISA, Lifetime ISA, SIPP and Junior SIPP.
Capital at risk.
Interactive Investor, recently acquired by wealth management giant Abrdn, is the second-largest investment platform in the UK. Interactive Investor is well known for its fixed monthly subscription fees (as opposed to annual percentage-based fees like most other investment platforms). It has been providing investment services and financial information to UK customers since 1995.
If you choose to invest with Interactive Investor, you will gain access to over 40,000 investment options, including UK and overseas shares, funds, investment trusts, and ETFs. This is the second-widest choice of UK and international investments offered by an investment platform in the UK. You will also be able to access 17 global exchanges, including exchanges in North America, Europe and Asia Pacific. These include markets such as the FTSE 100, FTSE 250, FTSE All-Share, S&P 500, NASDAQ, NYSE, Dow Jones and more. In addition to the exchanges above, Interactive Investor offers Japanese, Indian and Chinese shares in the form of American Depositary Receipts (ADRs).
Interactive Investor gives you a free trade every month, which you can use to buy or sell any investment. After that, trades usually cost £3.99. The platform also offers a free regular investing service that allows you to deposit as little as £25 a month towards your investments without paying a trading fee each time. For those investing £50,000 or less, Interactive Investor offers a cheaper plan called Investor Essentials that costs just £4.99 a month. This plan does not come with the monthly free trade. Interactive Investor also has lots of expert ideas, research and insights, which can be helpful when choosing investments. Interactive Investor’s services include a Trading Account, Stocks and Shares ISA, SIPP and Junior ISA.
Capital at risk.
Moneybox is a UK investment app that allows you to invest in a range of tracker funds, exchange-traded funds (ETFs), exchange-traded commodities (ETCs) and US stocks. Moneybox offers two forms of investing depending on your investment savviness, investing strategy and attitude to risk. Beginner investors or those who prefer a ready-made portfolio can choose from the three ready-made portfolios on offer - Cautious (lower risk), Balanced (medium risk) and Adventurous (higher risk). Advanced or more confident investors can pick from the range of tracker funds, ETFs, ETCs and US stocks available and build their portfolios themselves.
The Moneybox app also empowers you to invest your spare change by rounding up your card transactions to the nearest pound and investing the difference on your behalf. For example, if you spend £2.30 on a snack, Moneybox will invest 70p for you. You can also instruct the app to make weekly or one-off deposits into your investment portfolio as it rounds up your spare change.
You can start investing with Moneybox with as little as £1. Moneybox offers commission-free trading on US stocks. However, fund management fees apply to other types of investments. A currency conversion fee of 0.45% also applies to US stocks. Moneybox’s suite of products includes a Stocks and Shares ISA, Lifetime ISA, Junior ISA, Personal Pension, and General Investment Account.
Please note: US stocks on Moneybox are only available via a Stocks and Shares ISA.
Capital at risk.
InvestEngine is a low-cost ETF investment platform that provides 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 investment 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 are a selection of ETFs based on your preferences and risk tolerance, and they have 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 stands out amongst its competitors as one of the cheapest investment apps in the UK because it charges no platform or management fees on its DIY Portfolio and just 0.25% a year on its Managed Portfolio. You can also start investing with as little as £100. InvestEngine’s suite of products includes a Stocks and Shares ISA, Personal Account and Business Account.
Capital at risk.
Freetrade is a popular app for investing in stocks in the UK, offering a mobile trading platform that gives access to thousands of UK and overseas stocks, ETFs, and investment trusts covering different sectors and markets worldwide. The Freetrade app can be accessed on iOS and Android and offers a slick and easy-to-use user interface and experience. The app is also a great choice for both beginners and experienced investors.
With Freetrade, you can invest in fractional shares of even the most expensive US shares with as little as £2. Depositing, trading and withdrawing on Freetrade are commission-free (other charges may apply). FX rates apply to US stocks at the spot rate + 0.99%. To get the most out of Freetrade, you can choose from three subscription plans. The Basic Plan costs £0.00 per month and allows you to open a General Investment Account (GIA) and trade commission-free. The Standard Plan costs £5.99 per month and allows you to open a Stocks and Shares ISA in addition to your GIA. With the Plus Plan at £11.99 a month, you get a Self-Invested Personal Pension (SIPP) and a Stocks and Shares ISA in addition to your GIA. Dealing on Freetrade is commission-free, irrespective of the subscription plan you choose. Freetrade’s suite of products includes a Stocks and Shares ISA, General Investment Account (GIA) and SIPP.
Special offer: Get a free share worth £10 when you join Freetrade and fund your account with at least £50.
Please note: When you invest, your capital is at risk. The value of your investments can go down as well as up, and you may get back less than you invest. ISA rules apply. SIPP eligibility and tax rules apply. Free share terms and conditions apply.
Wealthify is a UK robo advisor that allows you to choose from five investment Plans based on your attitude to risk. These investment Plans are named Cautious, Tentative, Confident, Ambitious and Adventurous and allow you to choose a risk level that best suits your needs. If you are conscious about the environment or would simply like to invest in line with your values, each of Wealthify’s five portfolios is also available as an ethical investment Plan, so you can stay true to your values while potentially growing your money.
With Wealthify’s ISAs and General Investment Accounts, the minimum investment is £1, and you can withdraw your money anytime. There is an annual platform fee of 0.60%, and fund management fees range from 0.16% to 0.70% per year, depending on your chosen investment theme. Once you complete the signup process, you can start investing with a lump sum, which you can top up as frequently as you want.
Wealthify’s suite of products includes a General Investment Account, Stocks and Shares ISA, Junior ISA and SIPP in both Original and Ethical themes.
Capital at risk.
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