How to invest (for the long term)

What do you think of when someone says the word "investing"? Making your fortune in Bitcoin and retiring months later? Stressed stockbrokers yelling down the phone? Perhaps you imagine yourself as Leonardo DeCaprio in The Wolf of Wall Street, quaffing champagne and living the high-life?

For most of us, this sums up our limited (and flawed) knowledge of investing. But what if I told you there was another (less sexy) way to invest? An effortless, low-stress way that could make you a millionaire by retirement? Here are my five no-nonsense steps to investing (for the long term).

Nostalgic about those late nights cramming in the university library before an exam? Nope, me neither. However, if you truly want to learn how to invest successfully for the long term, you need to hit the books.

My journey towards financial literacy began with John Bogle's The Little Book of Common Sense Investing—a great guide on how to apply common sense to the complex world of investing. Other must reads include Robert Kiyosaki's Rich Dad, Poor Dad (a fantastic "myth-buster") and Morgan Housel's The Psychology of Money (an easy-going collection of short stories that challenges the way we think about money).

Now that you've armed yourself with some knowledge, it's time to put it to use.

Whoever told you not to put all your eggs in one basket hadn't read The Little Book of Common Sense Investing. In his book, John Bogle, tells readers to buy the haystack, rather than search for the needle. The haystack he was referring to was an "index fund".

An index fund is a basket with lots of different eggs. Many of us think that being a good investor means painstakingly hunting for the best eggs, like we're the Easter Bunny. Instead, with an index fund you have a ready-made basket containing lots of different eggs—no hunting required. The eggs, are shares in different companies listed on the S&P 500 (the 500 biggest US companies), FTSE 100 (the 100 biggest UK companies) or other indexes. 

Vanguard UK (my preferred choice), Hargreaves Lansdown and Fidelity UK are just a handful of reputable companies offering index funds to UK investors.

The benefit of index funds is that they are low cost, meaning more of your hard-earned money stays where it belongs: in your pocket! The reason for their low cost is that they are passive. Unlike actively managed funds where a flashy fund manager promises to help you "beat the market" (for a hefty fee), index funds are automated.

This keeps costs down. Last month Vanguard took a "whopping" £1.22 from me in account fees (for the period January to April). With actively managed funds you can expect to pay anywhere between 0.6–1.5% in fees whereas the equivalent index fund may charge as little as 0.1%. It may not sound like a big difference but, as one of our beloved supermarkets reminds us, "every little helps".

Vanguard, Fidelity and Hargreaves Lansdown all offer funds with fees ranging from as little as 0.20% to 0.45%. 

Believe it or not, that's the hard work done. Once you've chosen the right index fund for you, all you need to do is sit back and relax—while regularly feeding money into the account of course!

When I first opened up my index fund, I found myself logging into my account each morning, frantically scanning the page like an anxious teenager on results day. Nowadays, I treat my index fund like an acquaintance: I check in every six months or so.

Remember, with index funds you are investing for the long term. So, unless you enjoy bloodshot eyes, keep checking to a minimum.

Investing is no substitute for saving. No investor worth his or her salt invests all their money. In fact, many experts warn that you should only invest after saving six to twelve months of expenses first.

But if you are going to save, make your money work. That's why you need to get acquainted with LISA (no, this isn't dating advice).

LISA is an acronym for the Lifetime ISA, a government sponsored ISA (Individual Savings Account) that you can use to buy your first home or save for retirement. Each deposit you make, the government tops up by 25%. Best of all, it's tax free!  

The LISA offered by Moneybox gives you 3% interest on top of the 25% government bonus.

If you follow these no-nonsense investing tips, you'll be well on your way to financial success—for the long term.

At Reader's Digest we have partnered with Unbiased for trustworthy expert guidance and advice on your savings and investment.

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