If I Started Investing in 2025, This is What I'd Do

Over the last few years, this world of ours and the stock market that represents it has been on a bit of a wild ride, hasn't it? In times like this, I think it's really useful to get back to the principles of investing and remind myself why I invest, what I buy, how I buy it and when do I buy it. Every investor should be able to answer those questions about their portfolio. So let's do just that and talk about everything that I would think about if I was starting investing again today. This should not be seen as financial advice. I'm not a financial advisor and your capital is at risk when investing. I'm no expert either, but what this video represents is the collective wisdom of dozens of peer-reviewed academic papers about investing and data stretching back over 120 years. I've linked everything below for you. But let's start with that first question, shall we? Why do I invest? My answer to this question always starts with cash. Because when you understand the benefits and negatives of this, the benefits and negatives of investing, we're going to talk about the stock market specifically, they become really clear. I have two examples of five pound notes here. Clearly, this one is older than this one. I mean, this one looks a bit haggard, doesn't it? You can also see that there's a date on the back there of 2015. Even the cashier's signature is a giveaway of age. All very nice, but do you actually care? If I give you this one or this one, you're taking either, right? Here lies the main benefit of cash. Regardless of the time that passes, the value of this five pounds will always be five pounds. There's no risk of you waking up one day and this suddenly being worth three pounds, say. That certainty of the on-paper, the nominal value is really useful when it comes to things like paying for your bills or saving for short-term savings goals like a holiday, a car or whatever. But there is a difference between these two notes, an invisible difference. Or a better way of putting it is, there's a difference between how much you could buy with each of these notes when they were made. According to the Bank of England's official calculator, five pounds in 2015 would buy you what £6.80 does today. Another way of saying that is that this note from 2015 has lost nearly one quarter of its purchasing power. I didn't rip it. It came to me like this. It's been sat in a drawer in my bedroom for years looking for a use and now we found one. I know people are going to tell me that if I take it to the bank and all of that, but I'm just lazy, right? I haven't done it. This trend has been persistent for a very long time. Five pounds in 1209 would get you what £8,644 gets today. This invisible destruction of purchasing power represented by this ripped five pound note is inflation. And it's fair to assume that it's not going anywhere. So for the money that you plan to hold long-term, we need to outrun that force. We need to outrun the effects of inflation. And if we look at the stock market and the attributes of that, it's the complete opposite story. Over roughly a 50-year time period starting in 1971, if you invested in the global stock market for 24 hours, you had around a 52% chance of making money. So 48% of days over that period resulted in a loss. If you increase the timeframe from one day to three months, the chance of making a profit got up to 66.5%. At one year, it's 73%. At 10 years, it's 94%. Pick any day across that 50 years, start investing and do it for 20 years, and you would have produced a positive return. The benefits and negatives of cash and stocks are almost the exact opposite. So here we have certainty over the on-paper value, which is great for paying bills and saving short-term, absolutely terrible when it comes to beating inflation, versus the stock market with its uncertainty over short-term prices, but a track record of delivering inflation-beating returns and growing wealth long-term. When deciding which one you should focus on, you should think about it through the lens of time. And when will I need this money? I might need it in the next few weeks, months, or a year. Well, easy access cash savings at the highest rate possible. Saving for one to five years, maybe you're looking at bonds or accounts that lock the money away for a better rate. Five to 10 years plus, these funds are potentially invested in assets with the ability to grow long-term. The global stock market has averaged a rate of return of around 8% a year. If you knock the impact of inflation off that figure, you get what's called the real return or the inflation-adjusted return. This is really important because let's say your wealth grows by 3%, but inflation is also 3%. So everything got 3% more expensive in that year. Well, you are no better off, are you? Because your wealth has grown at the same rate that everything has actually gone up. The real inflation-adjusted return tells us how much richer or poorer we've got in real terms. The real return of the global stock market has averaged out of 5.1% a year between 1900 and 2023. That is according to extensive data from this paper produced by Dimson, Marsh & Staunton. This is the 2024 version. And I would say this is the gold standard of research when it comes to stock market returns and other asset classes like bonds and such. They have data on 23 countries that goes back to 1900, another 12 countries with at least 50 years worth of data, and then another 55 markets that are more recent. I'm so glad there are people out there that do this wonderful work and I just get to sit here and talk about it to you. But yeah, all my sources, again, are linked below for you. And thank you, Dimson, Marsh & Staunton for doing this. If we focus on the markets with the most data, here they are ordered in terms of the inflation-adjusted return again. All of them have produced a long-term positive annual return. Austria nearly let everyone down. But the USA sits here at the top at 6.5%. The world, not including America, which is marked as WXU, is at 4.3%. And then the world as a whole, everyone included, 5.1%. To put that number into context for you and what it means, you might be able to get, say, 4% to 5% on a cash savings account at the minute in a bank account if you're lucky and you shop around. That's a pre-inflation number. The latest official inflation figures, which include housing costs, are at 3.4% in the UK. So that means you're getting a real return after inflation of somewhere between 0.6% and 1.6%. Let's say you save £200 a month for 50 years. A real return of 1%, you end up with 156K versus that 5%, you get 516K. So question number one, why do I invest? Because the global stock market for a century and a quarter now has a long track record of delivering returns for long-term investors that are significantly above the rate of inflation. Past performance, of course, is no guarantee of future performance. But what we know for certain is that inflation is a persistent force that eats away at the spending power of our money. If we do not find ways to outrun it, it will destroy our purchasing power, it will destroy our wealth. Okay, next question then, what do we buy? Looking at this chart, the answer seems pretty clear, doesn't it? Buy America. Why on earth would you buy the second best investment or the 12th best investment in the whole world like I do when you could just buy the one? Let me counter that then with another question. Why would you buy the American stock market when you could just buy tech businesses? The best performing part of the American stock market in recent times. Or how about forget that, don't buy all the tech businesses because you get some crap ones. Why not just buy the best business? The very best one, this one. This is the best business in the American stock market over the last 10 years, NVIDIA. Well, this is a potato, but it represents NVIDIA because they make chips. I'm sorry. Let's say you go all in on this one business, 100% of your investment in this because you believe that this is the best company right here in the world. I mean, it might be the best company on the planet. It's a pretty nice looking potato, right? But here's a cautionary tale for you. In 1999, another tech giant is the best business on the planet, Cisco Systems Incorporated. And not too dissimilar with the NVIDIA story in AI today, everyone thought Cisco was about to benefit from a new emerging technology, the internet. Alison, can you explain what internet is? Between January 1995 and March 2000, the share price went from $2 to 79, making it the largest company on the planet. The annual report in 1999 urged investors to capture the momentum. Shortly after this was published, the dot-com bubble burst and Cisco shares fell by 89%. And today they've only just recovered to those prices. The mad thing is that Cisco did actually keep growing and the internet did change the world. I mean, we all know that, right? But this share price had reached such fever pitch heights that it didn't matter. It still wasn't enough. When you buy a single business here represented by a potato, you take on huge amounts of risk. If it goes right, you do very well. Amazing, yeah. But are you ever paying? Are you wrong about the business in general? What happens if the management are committing fraud like Enron? What if a competitor comes along and just blows them out of the water? Before I said that investors should look to invest long-term because that's one of the main features of the stock market that it tends to do well over the long run. When it comes to buying an individual company, it's the complete opposite because what we know about most businesses, all businesses in fact, is on a long enough timeline, they will fail. One way to diversify that risk is to go, okay, I'll buy all of the businesses in that sector then, all of the tech businesses, Nvidia, Apple, Meta, all the heavy hitters. You know, I'm going to tell you another story, right? This is the United States stock market in 2024. The big section here is the technology companies, the dominant trend of our time. Cutting edge technology that we all use every day that has powered growth in the US. Here's the United States stock market in 1900. What sector is this, do you think? Just look at how dominant it was. It was rail. When George Stevenson first announced his plans for a steam-powered locomotive running on tracks, he was laughed out of the room by his peers. The legend that he was walked out of the room and proclaimed, one day I will astonish the world. He did just that, shout out to Teesside in the Northeast of England. But he changed the face of the global economy forever and a laughable idea became the dominant sector in global markets. And as titans of rail emerged, some of the richest people we've ever seen, do you think it would have been laughable to them at the time that their industry would be surpassed? Yeah, here we are. Could tech fade away? That might sound wild, but looking at the global trend of an ageing population in the West, is healthcare and pharmaceuticals set to become the next big thing? Buying just one sector like this is risky because they could fade away or you might just miss out on the next big thing. Okay, so instead of buying just one sector then, let's say, okay, I'm going to buy the whole market. I'm going to buy every type of sector within the American market. We're going to represent the American market here using a very recognisable American brand. We've got the chips inside because you know, potatoes. Oh, they're stale. They really don't travel well, do they? Anyway, this represents the whole American market and the dominance of the American market has been spectacular. It's asserted itself to a position now where it makes up about 60 to 65% of the total global stock market is just the American market. But this was not always the case. In the early 1900s, the UK was dominant as represented by its penchant for thick chips. This chart shows it better than the chips do. The UK represented 25% of the global stock market at that time. If you backed the winner at that point, if you backed the dominant force, then you would have missed out on the rise of America. In the 70s and 80s, Japan was set to take over. There's a book called Japan as Number One Lessons for America first published in 1979. And it urged Americans to adopt the ways of the Japanese as America was experiencing stagflation and perceived to just be an overall decline in influence. The Japanese bubble burst in the 90s as you can see here. 18 months ago when I last made this video, I pointed out that just because America has done well doesn't mean that it always will. Things change and that change can be for many reasons. It could be a speculative asset bubble or even the actions of a leader. But I look at this chart and I come back to that point again that an investment in all of this, the whole world, the whole lot has produced investors an average return of 5% above inflation for over 100 years. What do I buy apart from loads of random different potato items from co-op? I buy a global index. Why? Because I'm not smart enough to predict the fall and rise of nations. And what I know is from the past is that when everyone is convinced that a country has cracked the code, that they're the special ones, that they know what they're doing, that's normally when the shiitake hits the fan. That book, Japan is number one, is one of the best-selling books written by a Westerner in Japan. A book aimed at the Americans talking about how Japan was doing everything so well became highly popular with the audience that it praised. I think there's probably a lesson in there somewhere. A global index fund allows me to spread my money across companies, countries, sectors of all different sizes, flavours, of all different locations around the world. Don't worry, none of it will go to waste. It'll all be eaten apart from those minging McDonald's chips that have gone really stale. Having this balanced, diversified portfolio reduces my risk of exposure to one business that completely fails or a country that fades in relevance and allows me to have more stable growth long-term. I'm looking to grow my wealth over years and not wake up one day and go, well, crap, it's all gone. I'm looking to reduce the spread of potential outcomes by eliminating the extreme ends. That means that I won't wake up one day, my portfolio's increased by 100 times in a night. Okay, but it also means I won't wake up and everything's gone, which is great. And that's key to hitting my long-term financial goal. Okay, so where do I buy the global investment from? You can get them two for one at co-op, but the answer really is that I buy a low-cost global index fund inside a tax-efficient account. Let's break down what that means while I tidy this up. I'm gonna start with the whole tax-efficient account point. In the UK, these are either ISAs or pensions. You get 401ks and Roth IRAs in the States, but they're tax wrappers. So they wrap up your investments and they protect them from tax. They work differently. And I think personally, I like the combination of both in the UK, a pension and an ISA because it provides the best trade-off between flexibility over when I can access and tax efficiency. But instead of going through each account in detail right now, I've gone into the details about the benefits and use cases of those account types. And everything that I've discussed here today in more detail on my completely free investing in index funds for beginners course, where I look at this topic of investing in index funds and everything we've discussed today. It's hosted on my website, Financial Interest, and you'll find it linked below. It's two hours of completely free course modules that go through everything step-by-step, including things like how to set up an account with an investing platform. If you think I haven't answered a question today for you, start there because I probably have there. As part of it, you'll also get access to this cheat sheet as well that outlines some of the most popular global and American index funds on each of the investment platforms in the UK. I've also included my thoughts on them. I can't tell you what to buy, but hopefully that will give you some inspiration and help you pick for yourself. I will say this though, when it comes to buying a fund, I think a lot of people kind of sit around analyzing, looking for the very best fund to buy, and it stops them from getting involved. Remember, just because you buy a fund today doesn't mean that you can't change your mind in the future. Nothing is fixed with this. And for me, as long as it's a low cost global fund from a reputable provider that tracks the underlying index well, I'm happy with it. And I'll explain what all of that means in the course in more detail for you. Okay, so I know why I invest and I've also decided what to buy. Now what? I think the answer to that question is strap in. The US stock market is the most successful stock market on the planet over the last 125 years. The growth in that market looks like this plotted on a chart. You would expect then that riding that ride of astonishing performance upward would have felt pretty smooth, but it was far from it. This chart plots along the bottom the real return of any given year from minus 50% up to plus 60%. So if a year falls into this section, that means investors that year after inflation was accounted for lost 40%. Six years did that between 1900 and 2023. In fact, 42 years over the period, around one third of all of the years lost money after inflation was taken into consideration. Eight of them since the year 2000. So this is the best market on the planet over the period and you can see the returns are scattered all over the place. As a new investor, we need to look at this and we need to realize that the varying results year to year are perfectly normal, even in a market that's performed better than all the others. Just consider that this stack of results all lined up here represents everything the American market has been through over the period. World wars, cold wars, pandemics, inflation, oil crisis, stagflation, and much, much more. The original publication of Dimpson, Marsh and Stoughton's research that I've referenced heavily in this video was called Triumph of the Optimists. 101 years of global investment returns. A nod to the fact that those investors who had remained positive on the prospect of investing had done well throughout all of this crap. It's now 125 years, not 101, and it still rings true. And in that time, we've had a few bubbles of our own. A financial crisis, a global pandemic. I'm betting that we have more, more messes, and I'm also betting that long-term optimists will triumph. I'm literally making that bet. I've got 90% of my net worth in the stock market. Okay, the final part that we need to look at is the very human temptation to go, I'm just going to try and miss out the bad years and only get the good years. So-called market timing is just not something that is worth even trying to pursue, I don't think. In both actively managed funds and index funds, individuals exhibit poor investment timing. That line is taken from this paper published in the Journal of Banking and Finance. And it finds that investors who try to skirt the bad years and only buy the good ones do badly on average. It's not just this paper either. It's repeated across the academic literature. This study by Brad M. Barber looked at 66,000 households and found that over a period where the stock market returned 18%, investors who tried to time the ups and downs, they got 11.4%. My favorite is the Dalva study. They look at this every year. They found between 1998 and 2017, a period where the top businesses in America clocked up an average rate of return of 7.2%. Even after going through the dot-com bubble and the financial crisis, the average investor clearly trying to dodge it all, they got 2.6%. And inflation was 2.1%. They barely beat inflation. In an attempt to remove the downside of short-term uncertainty over prices and falling stock markets, they dipped in and out and they got themselves little of the benefit. One of the hardest things about investing is combating this emotional battle of seeing your portfolio drop short-term because it will do that and just constantly wondering, you know, should I buy? Should I sell? What should I do? So this is our final question. When should I buy? My answer to this question is yes. I consistently invest. Every time I have cash, I put it in the market. People often call a consistent investment approach into the market over a period of time. Pound cost averaging, dollar cost averaging. I don't care what you call it. Potato, potato. All I care about is removing the emotion from the decision. Getting my money into the market, working for me. Removing my brain from the process because being smart is not enough here. Isaac Newton, the guy who discovered gravity, lost most of his money trying to time the South Sea bubble. I can calculate the motion of heavenly bodies but not the madness of people. The smart thing to do here is to recognise that it's your emotions that are the biggest threat to you achieving your financial goals. So you've got to find a way to remove them. I do that through consistently buying into the market. I don't care if it's the best strategy on paper. You know, some investors will be good at timing the market. They do exist. In the same way that some people can run the 100 metres in under 10 seconds or turn this potato into an amazing pomme purée. Sadly, that's not me. I'm far more average than that. But that's okay when it comes to investing because actually, it's average that we're after. Take an average amount of cash and average it into the market every month in the pursuit of that average return of about 5.1%. Do that on repeat and the results will be far from average. All it takes is time.