Investing in stocks and shares is probably the best way to build your long-term retirement wealth, yet not enough people do it.
It’s not that difficult
This is a massive shame, especially since the government gives us all a great incentive through the annual £20,000 Stocks and Shares ISA allowance, which allows you to take all your returns free of income tax and capital gains tax.
Many people simply don’t know where to start. That’s understandable, as there are hundreds of different companies listed on the London Stock Exchange, and buying individual stocks is simply too risky for many.
So let’s keep things simple.
Choose your platform
Your first step is to open an ISA account with one of the major UK trading platforms, here’s a list of some of the best. You’ll need proof of ID and either a current account or debit card, and can start trading within a few minutes.
That still leaves the other problem. What do you buy? For beginners, I would recommend a passive investment fund that tracks the fortunes of the UK stock market.
The FTSE 100 index of top blue-chip stocks is by far the best known index as it gives you exposure to the UK’s largest companies. Like any market, it will be volatile in the short run, rising and falling as investors rush to buy or sell shares.
Some companies will do well, some will do badly. One or two might even go bust. By investing in a spread of stocks, you have a massive cushion if one fails.
Patience is the ultimate virtue
Never invest in the stock market for less than five years and ideally you should leave your money for 10, 20, 30, 40 years or more, the longer the better. That way you don’t have to worry about short-term volatility, which always passes if you give it enough time.
The easiest way to start is to invest in a dirt cheap FTSE 100 tracker. Exchange traded funds (ETFs) are hugely popular because you can buy and sell them in seconds like any stock, and the charges are as low as can be.
For example, the iShares Core FTSE 100 UCITS ETF has no upfront charge and an annual fee of just 0.07% a year. The HSBC FTSE 100 Index tracker runs it close with charges of 0.18% a year.
You could widen the net by also buying the iShares FTSE 250 UCITS ETF, which invests in the next 250 largest UK companies, which often grow faster than large-caps. It charges 0.4%. The SPDR FTSE UK All-Share UCITS ETF widens the net further by investing in around 650 listed UK companies, charging 0.20%.
Make sure you invest all your dividends back into the funds for growth. Over the last 10 years, the average annual return from the FTSE 100 with dividends reinvested was 8.3%, but if you took the dividends instead, that falls to 4.3%.
Top up your fund whenever you can, otherwise just sit back and leave your money to grow, ignoring short-term stock market upheavals. What could be simpler than that?
Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.