5 reasons you should invest in 2024

Learning how to invest was a large part of how I dragged myself out of the £85,000 worth of debt that training to be a doctor put me in and got to the position that I'm in today which is working towards financial freedom. But there is a bewildering array of complex financial information out there and it can be hard to know where to start. So today I'm going to summarise 99 pages of this complex financial information from J.P. Morgan's latest version of Guide to the Markets and I'm going to summarise that into just five key lessons that can help anyone just to get started and understand investing a bit better. And we're going to learn by the end of this video why compound interest is the eighth wonder of the world and getting started with investing is really, really important. Why diversification is the only free lunch in investing and why Jack Bogle says don't look for the needle, just buy the haystack. If you're new here and you like these videos don't forget to hit like and subscribe and towards the end of the video I'm going to tell you the changes that I'm making to my own portfolio as a result of this information but also ask for your feedback so that we can keep making content that is useful to you. Lesson one, invest early to maximise compounding. This is an amazing chart because it shows you the power of investing early. So what we've got here on the left is someone who starts at the age of 25 investing £5,000 per year with an average of 5% growth. So if you do that at age 65 you have £639,000. Whereas if you started at age 35, again investing £5,000 per year with a 5% return, you'd have £354,000 at the age of 65 or £285,000 less. What's even more remarkable and why this chart is so powerful because it demonstrates what is basically compound interest is the person who started at age 25 has only contributed £50,000 more, £5,000 a year for 10 years, than the person who started at 35 but by the age of 65 that £50,000 extra has compounded into an additional £285,000 at age 65. So that just shows you the power of compound interest and why getting started with investing early is really important. So I wasn't able to start investing at age 25 because I was still at medical school and I had terrible debts like credit cards that I needed to pay off before investing. When I did finally have enough money to invest it was tiny amounts, £50 a month, which at the time felt totally pointless but over the years these early small investments have just continued to compound. So if you're lucky enough to start investing at age 25, great, but if not just start as soon as you can and this graph is one of the reasons why my children invest and I talked about how I'm teaching my kids about money in another video. Then on the right of this graph we see the power of reinvesting dividends. So quick recap, dividends are money that companies pay to people that own shares in that company and if you're buying funds, which I'm going to define in a minute, sometimes you'll see income after the fund name which generally means they don't reinvest the dividends and sometimes you'll see accumulation or ACC sometimes after the fund name which means they do reinvest the dividends. So that's just something to watch out for if you're managing your own investments. All right, lesson two, cash is not a safe haven. So this graph shows you why cash is not a safe haven and sometimes you'll hear people say cash is trash. Before we do that, a quick jargon recap. So if you look at the chart you'll see that it says equities. So equities are also called shares or stocks, they're all the same thing. They're units of a company that can be bought and sold and the value of the share, the stock or the equities fluctuates depending on its perceived value. Bonds are a way of loaning money to an organization issuing the bond which is often a government or a company. It's effectively an IOU between you, the investor and whoever issued the bonds and you might see in the UK that government issued bonds are called gilts and in the US they are called I already mentioned funds which sometimes are called exchange traded funds or investment trusts and funds are just a way to buy a selection of different investments all grouped together. So hopefully that helps to demystify some of the jargon that's already appearing on this chart. So equities, same as shares and stocks, bonds we talked about, cash, self-explanatory. So looking at the graph, you can see that long term investing in equities has massively outperformed bonds and the reason cash is not a safe haven is because although it might feel less risky to keep cash under the mattress instead of risking it all on investments, in fact unfortunately cash is not a safe haven because inflation is constantly eroding the value of that cash. So look at this chart. If you invested £1 in 1900 in equities, today you would have £386. If you put that £1 into bonds, today you would have £4. If you put that £1 into cash, today you would have £2. So that just shows you that in the long term equities have massively outperformed bonds and cash. Lesson 3, diversification is the only free lunch in investing. Have a look at this colourful chart which shows the best performing asset class in any one year. So for example in year 2016, HY bonds or high yield bonds were the best returning asset class, returning nearly 37%. Do you notice the pattern? The pattern is there is no pattern and that's really really important because what this shows is that you need to diversify your investments to reduce risks. So if you don't have a solid investing plan, more on that later, then you could end up chasing winners. So for example you might be reading the financial press in 2017 when as we can see EM equities were performing really really well returning 26% and think yeah I'm going to buy some emerging market equities. The next year these same equities lost 8.9%. Again in 2018 you might buy government bonds which returned 5.8% and then in 2019 these same government bonds returned only 1.5%. So if you're chasing winners like this you end up buying high and possibly selling low. And that is a surefire way to lose money. So unless you think you can predict the future and you can predict the pattern of a chart like this, one sensible option is to buy a wide range of investments and this is called diversification. As Jack Bogle the founder of Vanguard and proponent of low cost index fund investing says don't look for the needle just buy the haystack. Which he means don't worry about trying to select winning shares, the needle, just buy the haystack a broad diversified index fund that owns a little bit of all asset classes. Interestingly Jack Bogle had a pretty complex medical history and actually underwent a heart transplant but you're not here for information about that. So buying the haystack or diversification means not putting all your eggs in one basket and instead buying a wide range of investments which as we saw in lesson two over time equities have done very well. Lesson four, time reduces risk. One thing all investors worry about including me is losing money and as Warren Buffett says the first rule of investing is don't lose money and the second rule of investing is don't forget the first rule. And you might have heard people say you need to invest for a minimum of five years and the reason for that five year time frame is this next chart. So what this chart shows is a range of returns on several different types of investment from 1950 to 2022. For example if you held a portfolio of stocks denoted by the green bar for one year during that time period the maximum gain was 47 percent, great! But the maximum loss in that time period 1950 to 2022 was 39 percent and that's what we call volatile. You might win big but you might lose big and remember Warren's first rule of investing is don't lose money. In blue we have the same for bonds and in grey we have a portfolio of 50 percent bonds and 50 percent shares which as you can see is much less volatile. There's much lower highs and less low lows but the returns are also worse than the pure share portfolio which is in green. So if we move along the graph a bit to the five year returns you can see the maximum return for shares is 28 percent but the maximum loss is three percent so that's much less volatile than over one year. And if we move out to the 20 year time frame the maximum gain was 17 percent and there is no loss just a six percent gain. Holding investments for a longer period of time reduces volatility and decreases your risk of money. So that is why people generally advocate investing in stocks for a minimum of five years. Lesson five volatility is normal. Now you might have noticed from the previous chart that over 20 years the S&P index which is a group of 500 companies in America returned 11.1 percent but within this very nice sounding return is a lot of volatility. Some years good years and some years bad years but on average more good years than bad years. The point of this chart here which shows the good years and the bad years so good years bull market which is defined as more than 20 percent gain from the market drop and grey shows a bear market which represents a 20 percent or more decline from the previous market high. What you see is actually within that 11.1 percent average return for the S&P 500 is a tremendous amount of volatility and my point of showing you this is that volatility is normal and volatility is expected. Anytime the stock market goes down the newspapers screen crash and catastrophe because that's what sells newspapers. But by studying the history of what you are investing in it will help you to filter out this noise from the newspapers and the hysteria from people whose job it is to sell newspapers and instead you'll realize that volatility is normal and volatility is expected and over time as I said there will be more good years than bad years hence 11.1 percent return. Of course in investing nothing is guaranteed you've read the disclaimer you know that past performance is not a reliable indicator of current and future performance and you've also read the disclaimer on this video. So what changes am I making to my own portfolio as a result of this information from the J.P. Morgan's Guide to the Markets? Well absolutely none. The longer you invest for the more you realize that no one can predict the future and as Jack Bogle says don't look for the needle which is incredibly hard to do just buy the haystack. So I personally own a low cost well diversified mostly passive tracker portfolio and instead of trying to predict the future instead I'm focusing on what I can control and what I can control is my savings rate and making sure that my portfolio is nicely diversified and is as tax efficient as possible and if you're in the UK it's incredibly easy to make your portfolio tax efficient by holding it inside something called an ISA. I hope that helps to demystify a complex document and give you some pointers. Our channel is really new and we want to make content that helps you so if you could drop a love heart emoji in the comments if you want more investing videos like this a thumbs up emoji if you want more tax tips from Ed and a fire emoji if you want more videos on starting a side hustle and if you like these videos and you find them useful don't forget to subscribe to our channel and leave us a like see you on the next video.