It’s the simple things in life (and investing)
We often overcomplicate life don’t we? We fill our time, space and mental energy with more than we need. But deep down, so many of us are looking for ways to make life a little simpler.
We also overcomplicate investing. We chase hot tips, binge headlines and trade the market to try and make money. It’s not entirely our fault: the non-stop swirl of financial news, thousands of products and the ease of trading can make it feel like we should be doing more.
But when you strip away all the noise, the essence of investing can be broken down to four behaviours that are actually, quite..well..simple. When combined, can be really powerful in building wealth.
Let’s take a look at each one:
1. Being disciplined (to save)
Investing starts with the simple act of saving. That means choosing not to spend money today so you can build something for the future. With so many things we can buy today and rising costs of living, it can take some discipline and intention to set money aside consistently. It’s often underestimated, but the disclipine to save is crucial and ultimately the foundation of investing.
2. Ability to stay calm (staying invested)
The stock market has ups and downs. And the downs can be sometimes very sharp as people panic and sell. But over time, markets tend to reward those who stick around. That “extra return” you get from investing in stocks rather than leaving your money in the bank is your reward for keeping calm through the volatility. Us finance nerds, call it the risk premium. I’ve been there - it’s not easy to hold on when the market drops 20% or more. But that’s ultimately what you are paid for: for being calm.
3. Being patient (compounding)
Next up is re-investing the gains, interest and dividends, then giving them time to grow too. It’s where magic happens. This “compounding” doesn’t feel exciting at first because it works slowly, but its power grows (exponentially) the longer you let it run. In a world wired for more and more instant gratification, patience is what makes compounding possible.
4. Being aware (of tax advantages)
In the meantime, most countries offer tax-sheltered accounts or “wrappers” like ISAs or pensions (in the UK), or IRAs and 401(k)s (in the US). These accounts are shielded from certain taxes. Using these accounts doesn’t change what happens to the investment itself, but it can dramatically boost what you keep. Yes, tax is boring, but this means that the awareness of tax benefits (particularly for your pension) often flies under the radar. Its but it is there to help and because governments want you to invest, you just need to be aware.
Right. Let’s talk numbers
OK, so it may be sounding a little abstract if you are someone who likes to see something to believe it. So let’s do what I do best and crunch some numbers.
Here is an example:
Let’s say you invest £5K a year for 30 years and earn 6% a year. That gives you around £420K (rounded) at the end of the period.
The breakdown of the £420K comes from the following:(again, all rounded)
£150K from your savings that have been put aside
£140K from returns (6% per year)
£130K from compounding (the re-investing the 6% return)
In this case, that’s roughly one-third from each driver: being disciplined to save, the returns for taking risk (staying calm through market fluctuations) and being patient over time to allow the returns to compound.
Now let’s layer in the tax side of things. If that £270K (capital) gain - the total at the end (£420K) minus your savings (£150K) - came from your salary instead of investing, you would of course pay income tax. Depending on your tax rate, it would be:
20% of £270K = £54K
40% of £270K = £108K
45% of £270K = £121K
For comparison, that’s 13%, 26% and 29% of the total £420K, just from using the tax wrapper itself. Our progressive tax system means that for higher earners, the tax saving is naturally more important.
Investing can be simple
People often think investing is all about the complicated detail and having to outsmart others. This is a misconception that can become a limiting belief that even stops some people from starting.
With this example, I hope it is clear that investing can be simple and that there can be exceptional value and (crucially) financial reward from consistent, simple behaviours, done well over time:
Stay disciplined to save regularly
Stay calm through the downs
Re-invest and stay patient
Be aware of the tax you can save
That’s the simple approach to investing and it’s the kind of approach that makes life just that little bit simpler, too.