Why regular investing is the key to building wealth

One reason many people in the UK still don’t invest is that they fear they will lose all their money. However, if you’re worried about the risks of investing, it’s worth thinking about the risks of not investing. 

Keeping all your savings in cash may 'feel' risk-free because you're not exposed to market volatility. However, your savings are less likely to grow over time, as interest rates on cash aren’t usually much higher than inflation rates. In fact, inflation can often exceed interest rates, which is when the real value of your cash savings falls over time.

In simple terms, money makes money. The interest your investments earn can continue to generate more interest, a phenomenon known as compounding. Over a very long time period, much of your wealth can be generated from compound interest, not just your contributions.

If you consistently invest an average of just £2 every day (that’s around £60 a month) and your investments achieve average annual returns of 5% (after fees and disregarding inflation), this is how your savings could grow over time:

• Just over £9,000 after 10 years
• Almost £25,000 after 20 years, if you continue contributing
• About £50,000 after 30 years, with ongoing contributions

In the long run, this can raise the value of your investments potentially more than the pay rise itself, as compounding can do much of the work.

Often referred to as 'drip-feed investing', pound-cost averaging is when you invest fixed amounts each month, regardless of how the markets are performing. This approach can help to smooth the ups and downs to help mitigate the effects of volatility.

The main reason to use pound-cost averaging isn’t necessarily to generate better returns or ‘beat the market’. It's to help minimise the risk of short-term losses, which could reduce your investment gains over time. 

For example, imagine a scenario where the market experiences a downturn of 5% one year, followed by a recovery of 8% the next. 

• If you had deposited £2,400 as a lump sum at the start of the downturn, the value of your investments would have fallen to about £2,280* by the end of the year.
• But if you had drip-fed the same amount over 12 months (£200 a month), your investments would likely have fallen less, to around £2,336*. 

*This can’t be a precise calculation, as prices don’t fall and rise in a perfect linear fashion, but hopefully it gives you an idea of the main benefit of pound-cost averaging.

It's also worth setting up a Direct Debit so you don’t forget to put money away each month; however it is important to remember that any monies being put into investments are affordable, meaning you should ensure that you have sufficient cash set aside for emergencies before investing to avoid needing to drawing from your investment in the early years.

The  scenarios discussed is an example and what is right for each person will depend on individual circumstances.

There’s a popular saying that the markets will stay irrational longer than you can stay rational. Some people try to ‘time’ it and predict the next bear market (downturn) or bull market (when the market rebounds). However, focus on time in, not timing the market. Compounding can do the hard work for you – but it’s more effective when:

• You make regular contributions
• Keep your savings invested (ideally with dividends reinvested too)
• Boost your contributions after a pay rise

Missing just a handful of the best-performing days on the stock market could significantly reduce your long-term returns.

For example, imagine you had invested $10,000 into the S&P 500 - the index that tracks the performance of the 500 largest companies in the US - back in 2005.

• If you had stayed invested until 31 December 2024, your investment could have grown around $71,750*.
• But if you missed the 10 best-performing days during that time, your total would have dropped to around $32,871*.
• And if you missed the 60 best days, your investment could have fallen significantly, ending up at just $4,712*.

*With all dividends reinvested. This is for illustrative purposes only. Figures are gross of fees, based on total returns, and do not account for exchange rate fluctuations or inflation. The figures refer to simulated past performance and past performance is not a reliable indicator of future performance.

Source: Based on total returns from January 3 2005 to December 31 2024. J.P. Morgan Asset Management.

It's tempting to check your portfolio every day, but this usually does more harm than good, particularly when the markets are very volatile. Think of short-term price fluctuations as noise: it’s the long-term trends that really matter. 

• Don't be tempted to withdraw everything when the markets are down.
• People are more inclined to react to negative headlines than positive ones, which is why you might notice a ‘negativity bias’ in the media.
• Making hasty decisions based on short-term trends can jeopardise your long-term returns.

Remember - it’s very difficult for anyone to predict where prices will move next.

Diversifying your investments can help you reduce your exposure to volatility or negative events that have a disproportionate impact on a particular industry, region, or asset class (shares, bonds, property, etc). 

• Many investors put their money into funds, which include a large basket of shares of different companies and can help you diversify risk.
• If you prefer, you can keep a larger portion of your savings in lower-risk assets such as cash and bonds.
• You can also invest in ETFs (exchange-traded funds), which are a bit like shares but track an index such as a sector or region.

At SPW, we understand that investing can seem complicated and recognise that everyone’s ability to invest will be different. Therefore, our advisers can help you create a bespoke financial plan that’s tailored to your individual circumstances, taking into account affordability, your experience and knowledge, and your capacity to tolerate potential losses, as well as your future goals and aspirations. 

Fees and charges apply at Schroders Personal Wealth.

This article is for information purposes only. It is not intended as investment advice.

The value of investments and the income from them can fall as well as rise and you may not get back your initial investment.

Cash savings and investments are protected to the value of £85,000 per person per institution by the Financial Services Compensation Scheme (FSCS). However the value of investments may fall as well as rise.

In preparing this article we may have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.