Searching for the real secret of investment through social media is fraught with all kinds of dangers – from finfluencers demanding a fee for a ‘seminar’ of questionable value, to horribly misleading enthusiasts, who are convinced that massively risky enterprises like day trading, spread betting and crypto hold the key. In reality, the real secret to investment isn’t a wildly dangerous get-rich-quick scheme: it’s a far more realistic and sensible plan to get rich slow, and there are three simple rules.
The first is around risk. Very simply, the more of it you take, the more gains you could potentially make, but the more losses you could make too. It’s why when we researched the performance of our client’s portfolios, we discovered that the best overall gains tended to be made by people avoiding too much or too little risk. If you take very little risk at all and leave everything in cash, you run the risk that grows too slowly to keep up with inflation. However, if you take too much risk, your losses may start to undo your gains. The aim, therefore, is a sensible, balanced, diverse portfolio of investments.
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The second rule is to invest over the long term. This not only gives you the opportunity to ride out the short-term ups and downs of the market, it also means you take advantage of what’s known as the ‘miracle of compounding’. This sounds like dark magic, but is essentially where you get growth on your growth.
It’s easiest to see using an example, so for the sake of simplicity, let’s assume you get 10% growth a day on an investment of £100. In reality this is a ridiculous return, so isn’t going to happen, but it helps makes the maths clearer.
You might assume if you held this for five days, you’d make five lots of 10% - or 50% - so you’d have £150. However, compounding magnifies this growth. On the first day, you’d make 10% of £100, so you’d have £110. Then on the second day you’d make 10% of £110, so you’d end up with £121. If you kept doing this for five days, you’d end up with £161.
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In reality, you’re not going to make anything like 10% a day, but you can see compounding in action with a stock market investment. If you put £1,000 into a global tracker fund five years ago you could be sitting on a gain of £629. However, if you held it for four times as long, getting growth on your growth would give you more than nine times that gain – at £5,778.
The final secret is to try to set up ongoing investments, so you keep building. The benefit of setting up a regular investment means you don’t need to find a lump sum from thin air. You can drip feed as little as £25 a month, and make a real difference, and because you can set up a direct debit, you don’t need to remember to do the right thing either. If you were to invest £50 a month for 40 years, for example, with 5% growth you could build a lump sum of £76,301. If you were to get 8% growth, your nest egg could grow to £174,550. Of course, you don’t need to invest for anywhere near this long, but it shows the power of being in it for the long term.
If you’re looking for an argument against getting rich slow, social media is full of them. They point out that if you get rich slow, you’re not going to be wealthy until you’re older. And while there’s no refuting that, arguably when you’re older, and no longer earning money, that’s precisely the point at which having a significant nest egg comes into its own.