Key Principles

Why to invest

The power of compounding

At a 10% return per year, putting £500 per month into the stock market could make you a millionaire within 30 years:

Compounding is earning returns on your money, and then earning returns on those earlier returns as well.

• In year one, you earn a return on what you put in.
• In year two, you earn a return on the original amount as well as what you have from last year’s return.
• Keep going, and the growth speeds up because each layer of returns starts generating its own additional returns.

That snowball effect is why starting early and leaving investments alone for a long time can make even small, regular amounts grow surprisingly large.

The threat of inflation

The bad news is that £1m in the future is almost certainly going to be worth less than £1m today, thanks to something called inflation.

Inflation is a sustained rise in prices across the economy, driven mainly by banks and governments creating more money over time, thus making each individual unit of money worth less.

Many people think of investing as “risky”. We would argue that, given the threat of inflation, it is actually riskier not to invest.

You’re already invested

Your pension, salary rises, property — you’re in the game whether you like it or not. Investing deliberately beats investing by accident.

In a capitalist economy, value is always shifting, so you’re “investing” even if you never open an investment account.

Your pension, pay rises, and property are all tied into markets, inflation, and interest rates, so you’re exposed to the system whether you like it or not.

Doing nothing is still a bet: cash can be eaten by inflation, relying only on salary is a bet your labour will keep up, and owning a single property such as your home is a bet on one market.

Investing deliberately means choosing your risks and assets on purpose—how much to save, what to own, and how to protect yourself from inflation and downturns.

You can buy freedom

"If you don't find a way to make money while you sleep, you will work until you die" — Warren Buffett.

Without passive income streams like dividends or interest replacing your salary, you’re chained to trading your time for money (i.e. working) forever.

When your capital generates returns while you sleep (dividends, interest etc.), you're free for whatever life brings—travel, hobbies, or side pursuits.

Unlike labour (which stops when you do) or state support (which typically shrinks as demographics worsen), passive income scales with time and compounds quietly, handing you control over life’s big decisions.

Saving money can also be viewed as purchasing future freedom, and freedom from worries. The more capital you have built up, the less you worry about mishaps, unexpected bills, and anything life may throw at you.

You need to look after yourself:

Your tax & National Insurance contributions don't go into a personal savings account—they're used to pay today's pensioners right now, just like current income tax funds current spending on schools or roads.

There's no giant invested fund set aside for your future benefits; the current system assumes tomorrow's workers (and taxpayers) will cover you when your time comes.

The common misconception—"I paid in, so I get my pot back"—ignores this: if fewer workers support more retirees (due to ageing populations), either taxes rise, benefits get cut, or both happen.

In a capitalist system where lifespans are exploding (as warned in The Longevity Imperative by Andrew J. Scott), government pensions likely won’t be able to sustain 30–40 year retirements in the future.

Most developed nations have a precarious financial position having borrowed huge amounts during the global financial crisis and the COVID-19 pandemic. Together with this, they have low birth rates and growing life expectancies, meaning there will be less workers in the future to support more pensioners, making current pension systems seemingly unsustainable.

Governments have cut many areas of spending before, it would be naïve to assume spending on pensions won’t be cut by the time you reach pension age.

You need to look after your own finances, rather than rely on the government for anything.

How much you might want to save/invest

NB: There are a huge number of variables and assumptions that go into these projections. While they are based on reasonable assumptions, they are far from definite. This is just meant to be a reasonably informative guide.

The left-hand side of the above table shows examples of (pre-tax) income individuals may desire to have in the future. The right-hand side suggests a rough idea of how much they may need to invest into the stock market each month to reasonably be able to achieve this in the future.

Essentially, if you want to retire with an income of £40,000 per year, plan to retire in 40 years, and are starting from scratch, you might want to consider investing around £690 per month in order to be able to achieve this.

These numbers are based on realistic return and inflation assumptions, and are presented in present value terms, or “today’s money”. As illustrated above, an income of £100,000 may not be worth much in 50 years’ time thanks to inflation. This chart puts future income into today’s terms to provide a very rough guide of what kind of savings rate might make these ambitions reality.

For some people, these numbers will shock and scare them. This may be unwarranted, so please do not worry. However, for some it could be a well-deserved wake-up call.

The main point here, however, is that time is the greatest advantage any investor can have. Just look how much more you need to save with a 20-year time horizon than a 50-year one!

The earlier people start on their investing journey, the easier it becomes.

How to invest – Learning the basics

What’s your game?

Define your goal, time horizon, and risk tolerance first. You need to know what you want to achieve first and foremost.

You also need to always keep in mind that everyone’s playing a different game & that you shouldn’t copy the crowd. One person’s investment strategy may be very different from another’s simply because they are different people with different goals.

The real reason why there is no one right price for any investment is that each individual stock is worth something different so each different investor. This means markets can move quickly as different narratives dominate at different times. Accepting this is key to constructing your own strategy.

This means you can ignore the noise, the press, and other people’s opinions. Just focus on playing your own game, and growing your own wealth.

Crucially, even we can’t tell you how to invest, as everybody is different. All we aim to do is help you find a method that works for you!

Match your investments to your emotions – staying in the game is more important than anything

Markets swing wildly with fear and greed. Stick to your plan — time in the market beats reacting to headlines or panic selling. Emotions cost you the most when everyone else is emotional too.

Ask yourself: how much loss (on paper) could you stomach in a bad year without panicking and selling?

Think in percentages and pounds: “Could I handle a 25–30% drop on this pot?”

Your “sleep-at-night” level matters more than the theoretically perfect portfolio allocation.

Remember from the previous point, everybody is playing a different game – some people are tying to get rich quick (and most of those are failing to do so!), so there will always be sharp rises and falls in the market.

Managing your own portfolio to your own emotions is key to avoiding the possible pitfalls.

Pick your platform and accounts

Choose a low-cost platform and tax-efficient accounts (ISA, pension, etc.).

Types of investment account:

To choose a platform (website/app) to use to invest, we recommend using AI/google/reviews to find one that works for you. The AIC offer some great info here: https://www.theaic.co.uk/invest-engage/availability-on-platforms/costs-at-a-glance

The below table is one from that page, showing the costs of investing the respective monthly amounts into investment companies.

There are plenty of other comparators already out there, such as this one, which also offers a useful  summary: https://www.moneysavingexpert.com/savings/stocks-shares-isas/

Types of investment structure – Collective investments

There are three main types of investment structure beginner investors tend to focus on. All of these are “collective investments” which, as the name suggests, are designed for many people to come together, pool their money, and invest collectively in the same strategy. Many people know this as a “fund”.

The three main structures of fund are:

                           1. Investment companies

                           2. Mutual funds

                           3. Exchange Traded Funds (ETFs)

1. Investment companies (aka investment trusts / closed-ended funds) – Well, the clues in the name (😊) give this one away… These are companies set up specifically to invest in other companies, projects, or assets. They’re designed as collective investments—meaning many investors pool their money together—and they’ve been around for more than 150 years.

In fact, F&C Investment Trust, now a FTSE 100 company, was founded back in 1868 to give investors of “moderate means” access to the same kinds of opportunities that were previously available only to the wealthy, and most investment companies still have the same goals today.

The key thing to understand is that investment companies operate just like any other listed company. Investment companies raise money by issuing shares to investors. The funds collected are then invested across various assets—such as equities, bonds, private companies, property, or other asset classes—depending on the company’s specific investment mandate.

Most investment companies are closed-ended, meaning they issue a fixed number of shares that trade on a stock exchange. The share price moves up and down according to market demand and supply, so investors buy and sell shares on the exchange rather than directly with the company.

This setup differs from open-ended funds, which create or cancel units in response to money flowing in or out. Because investors in open-ended funds can withdraw their money at any time, these funds must keep enough cash or liquid assets available to meet redemptions.

Within an investment company, a professional portfolio manager, supported by analysts and governed by an independent board, is responsible for deciding how to allocate the company’s capital. Their goal is to deliver attractive long-term returns while managing risk on behalf of all shareholders.

If you’d like to learn more about what many consider one of the most effective ways to build long-term wealth, you can explore the Association of Investment Companies (AIC) website: https://www.theaic.co.uk/

2. Mutual funds (also known as open-ended investment companies / unit trusts) – These are another form of collective investment, where lots of investors pool their money together to buy a diversified mix of assets such as shares, bonds, or other securities. The fund is typically managed by a professional fund manager, who decides what to buy and sell according to the fund’s stated objective—say, steady income, capital growth, or exposure to a specific region or industry.

Unlike an investment trust, a mutual fund doesn’t trade on the stock market. Instead, investors buy or sell units directly from the fund manager (often once daily), with the price based on the total value of the fund’s assets. This structure means the fund can expand or contract easily as money flows in or out. This is why they are “open-ended”.

In the UK, these funds are typically structured as unit trusts or Open-Ended Investment Companies (OEICs). They provide an accessible and simple way for investors to gain diversified exposure without having to choose individual investments themselves.

3. Exchange-Traded Funds (ETFs) – ETFs are somewhat of a hybrid between investment companies and mutual funds. Like mutual funds, they give you exposure to a basket of investments—often stocks or bonds—but unlike mutual funds, they trade on a stock exchange just like ordinary shares and investment companies. They also expand and contract as money goes in and out of them.

They are essentially a mutual fund which is listed on a stock exchange.

ETFs have grown hugely in popularity thanks to their transparency, low cost, and flexibility—they can be bought and sold instantly, making them a favourite tool among both retail and professional investors.

The ETF is by far the youngest structure mentioned here, with the first being launched in the US in 1993. Their popularity has skyrocketed since then, however, with this becoming arguably the dominant structure for collective investments.

Types of investment management – Active vs Passive

The most common type of Exchange-Traded Fund (ETF) is a passive ETF. This kind of fund aims to replicate the performance of a specific benchmark index—such as the FTSE 100 or the S&P 500—often by holding the same securities in the same proportions as the index itself. Because the fund’s holdings are determined entirely by the composition of the benchmark, there are no active decisions about which assets to buy or sell. For this reason, such funds are described as passive investments, as they simply “track” or “mirror” the market rather than trying to outperform it.

In contrast, active investing involves employing a fund manager who makes deliberate choices about which assets to buy, hold, or sell within the fund. The manager typically follows a defined investment mandate—such as focusing on large Japanese companies—and uses research, analysis, and judgment to identify what they believe are the best opportunities. The goal of active funds is to beat their benchmark, rather than just match it, though this often comes with higher fees (paying the fund manager!) and varying levels of success.

Most academic research points to passive investing outperforming active over time. Jack Bogle, founder of Vanguard who specialise in passive funds, puts it simply by suggesting that the average investor will earn the average return, so whoever does so cheapest will do best.

There is certainly merit to passive investing, but perhaps too much focus has been on this in recent years. There are also many reasons to opt for active funds, especially in more obscure areas of the market which may be less efficient. For example, some investors prefer to be passive in large US companies, but active in smaller Asian companies.

This is certainly not a recommendation on our part, merely an illustration that the argument is not as black and white as some people often make it.

Some people even argue that it is hard to be truly well diversified by only using one type of strategy, and that blending active and passive management could be beneficial.

Valuing investments – the P/E ratio

The P/E ratio is a quick way of saying, “How many pounds am I paying for each pound of this company’s profit?”

The basic idea

• Every share has:
• A price (what it costs today).
• Earnings per share (EPS) – the company’s profit divided by the number of shares.
• The P/E ratio compares those two: it shows how much investors are willing to pay today for £1 of the company’s annual profits (aka earnings).

The simple formula

For example, if a share costs £20 and earnings per share are £2, then:

That means investors are paying 10 times the company’s current annual earnings for each share.

Thinking about the overall market

When people talk about the market P/E, they are usually looking at an index like the FTSE 100, S&P 500, or MSCI World and asking: “On average, how many pounds are investors paying for each pound of earnings across all these companies?”

• A higher market P/E typically means:
• Investors are optimistic about future growth in corporate profits overall, and
• They are willing to pay more today for those future earnings.
• A lower market P/E suggests:
• Expectations for growth are more muted, or
• Investors are more cautious or risk‑averse, so they are only willing to pay a lower multiple of earnings.

A simple way to explain it: if the market P/E is 20, investors as a whole are paying 20 times the last year’s earnings of the market. If, years later, the market P/E is 12, they are only paying 12 times earnings – either because prices have fallen, earnings have risen, or sentiment has become more cautious.

Investors often compare today’s market P/E with its own history (e.g. past 10–20 years) to judge whether the market looks:

• Rich/expensive (P/E well above its long‑term average), or
• Cheap/attractive (P/E well below its long‑term average).

It’s a rough valuation thermometer for the whole market rather than a precise forecast, but it’s a very intuitive one once someone understands “how many pounds per pound of earnings” as the core idea.

If you want to get a rough idea of how cheap/expensive various stocks are, try googling or AI-querying what the P/Es are of several markets. Alternatively, you could go to a website such as Vanguard, where they offer ETFs on pretty much all markets, and check the portfolio data of ETFs.

For example, here you can see the P/E ratio of the world index, which tracks stocks all around the globe: https://www.vanguardinvestor.co.uk/investments/vanguard-ftse-all-world-ucits-etf-usd-distributing/portfolio-data

Keep costs & tax low

Using the above knowledge, and inspired by Jack Bogle’s principles, a key lesson is simple: keep costs and tax as low as possible. Over time, even tiny leakages from fees and tax can compound into a large drag on your wealth.

Why costs matter so much:

Every ongoing charge – fund OCF, platform fee, transaction cost – comes straight out of your return. If a market delivers 6% a year before costs and tax, and you give up 1% in total costs, you only see 5%; over decades, that difference in compounding can mean tens of thousands of pounds less in your pocket. Each 0.01% may look trivial in isolation, but across a large portfolio and many years, it is worth fighting for.

As the below chart shows, an investor starting with £10k ends up paying 2x this initial stake in fees over 30 years at just a 0.5% rate:

Why tax is part of the same story:

Tax has a similar effect: it quietly shaves off part of your return every year, reducing what can compound for your future. Making good use of tax‑efficient wrappers (like ISAs and pensions), being mindful of trading that incurs taxes and costs, and choosing structures that minimise tax can all help keep more of your money working for you.

Diversification

Diversifying means deliberately spreading your money so no single thing can make or break your outcome. The theories behind this are:

Don’t let one bet sink you

Spread your investments across:

• Regions – e.g. UK, US, Europe, emerging markets, Asia. If one economy struggles, others may be doing fine.
• Company sizes – large, mid, and smaller companies. Big firms can be steadier; smaller ones can offer higher growth (with higher risk).
• Asset types – Eg. equities, property, infrastructure, private equity. Different assets behave differently in good and bad times.

Capture more of the world’s returns

Most people end up heavily concentrated in:

• Their home market (e.g. UK only).
• Only large, familiar companies.
• Just listed shares and cash, missing everything else.

By diversifying more widely you can tap into:

• Private equity (perhaps via listed investment companies), which backs unlisted businesses.
• Smaller companies, which historically have offered higher long‑term returns, albeit with more volatility.
• Underrepresented regions such as parts of Asia or broader emerging markets, where long‑term growth in populations, incomes, and consumption can feed into company profits.

Put together, a well‑diversified portfolio is designed not to shoot the lights out in any one year, but to steadily capture the returns generated by many different parts of the global economy over a lifetime.

Monthly investing

Monthly investing means building wealth by putting money to work consistently, rather than in occasional big lumps.

Monthly investing

Set up an automatic monthly contribution into your chosen investments (for example, via direct debit). Treat it like a regular bill going to your future self. By investing the same amount each month, you naturally buy more when prices are low and less when they’re high, smoothing out the impact of market ups and downs over time. This approach helps you stay invested and reduces the temptation to tinker.

Ignore short-term noise

Markets move every day, often for reasons that are impossible to predict or explain in the moment. If you react to every headline, dip, or surge, you risk buying high and selling low. Focusing on time in the market—letting your investments compound over years and decades—is usually far more powerful than trying to time the market by guessing the best moments to get in or out. A regular monthly plan supports that discipline.

Pay yourself first

“Pay yourself first” means treating investing as a non‑negotiable priority, not an afterthought. Instead of saving whatever is left at the end of the month, you move money into investments as soon as you’re paid. This simple shift in order—invest first, spend what remains—turns good intentions into a habit and makes long‑term wealth building much more likely.

Keep it simple

Keep it simple means designing an investment approach that is easy to understand, easy to run, and easy to stick with through good times and bad.

Keep it simple

A simple portfolio might be just a handful of broad, low-cost funds covering major regions and asset classes. The more moving parts you add—niche funds, frequent trading, complex strategies—the more you tend to increase costs, admin, and emotional strain without any guarantee of better results. A clear, boring portfolio that you genuinely understand is usually far more effective than a clever, complicated one you’re always tempted to change.

The best portfolio is one you can stick to

Market drops, headlines, and performance charts all test your emotions. If your portfolio is too complex or opaque, you’re more likely to panic or second‑guess it at exactly the wrong moments. When you know what you own and why you own it, you’re better able to stay the course, rebalance calmly, and let time and compounding do the heavy lifting.

Investing is an art, not a precise science

There is no single “perfect” portfolio that works for everyone. Your mix of assets, level of risk, and style (active vs passive, home bias vs global, etc.) should fit your personality, time horizon, and goals. Data and theory can guide you, but your behaviour—how you react to gains and losses—matters just as much. Part of the “art” is honestly observing yourself and adjusting your approach so that it feels sustainable.

Find what works for you

Some people are happiest with one or two global index funds and a simple rebalancing rule. Others prefer a bit more detail—perhaps adding smaller companies, adding Asian exposure, or private equity—because it keeps them engaged. The key is to build a structure that:

• You can explain in a few sentences.
• You can run with minimal effort.
• You can stick to through a full market cycle (ups and downs!).

If you meet those tests, you’re far more likely to succeed than by endlessly chasing the most sophisticated strategy.

When to seek professional advice

Some people need financial advice, and some don’t. People typically seek financial advice or professional investment management when their finances grow complex or large enough that it makes sense to do so.

Regulators impose significant restrictions and costs on advisors/wealth managers. To some extent, this is good as it helps reduce the risks of fraud and bad advice. However, it also increases costs and makes it not feasible for professionals to help clients with fewer investable assets.

This means that for UK investors, thresholds often start around £200k-£300k in investable assets for traditional advisors, though “robo-advisors” handle smaller sums. Often, below these sums, advisors won’t even take on clients.

People probably need regulated advice when:

• They are making a one‑off, high‑stakes, hard‑to‑reverse decision (e.g. giving up a defined benefit pension above £30,000).
• You want someone to take responsibility for telling them exactly what to do with a specific product or plan.
• They feel unable to judge the risks of a complex product or strategy on their own.

They can often rely on information/guidance when:

• They are learning how products work, what the jargon means, or what the general options are.
• They are choosing between straightforward, mainstream products and are comfortable they understand the risks and are making their own decision.
• They don’t need someone to say “this exact product is right for you”; they just need help understanding the landscape.

Please note: The information we provide is general guidance, not a personal recommendation. If you are unsure about the suitability of a particular investment or are considering complex or irreversible decisions, you should seek regulated financial advice from an authorised advisor. If you need help finding one, the website: https://www.unbiased.co.uk has a large database of potential advisors.