What is the Best Investment Strategy to Make Money on the Stock Market?

Investing in the stock market can seem like a minefield. Every day companies shift up and down and there are constantly new updates in the news. But investing doesn’t need to be hard work and it doesn’t need to be high risk. Provided you’re in it for the long term, putting your money into the stock market is a solid investment. Read on to discover my six step investment strategy for investing success and be sure to start as early as possible to ensure your investment continues to grow long after you’ve stopped paying in.

Note – This post is over 1200 words long. So the TLDR version of my six step strategy to make money on the stock market is summarised in the six points below!

Start early
Choose a platform with minimal fees
Find a suitable index fund
Set up automated monthly payments (dollar-cost averaging)
Reinvest your dividends
Wait patiently

Step 1: Start Early to Take Advantage of Compound Interest

Before you start investing I’d highly recommend familiarising yourself with the concept of compound interest. This video from Dave Ramsey gives a good overview. You can see from the graph below how it’s possible for a person to invest less and gain more simply by starting early. Those of us in our 20s and 30s are perfectly positioned to take advantage of this. Saving now will help you to become wealthy later with minimal effort!

Step 2: Choose a Platform with Minimal Fees

In order to invest in the stock market you need to sign up to an investment platform. When you’re choosing which to use the key things to bear in mind are ease of use and fees. I use two different platforms, Nutmeg and Charles Stanley Direct. It’s important to understand what fees your platform is charging as big fees could eat into your profits.

Nutmeg have an easy to use interface and as a robo-investor they simplify the investment process for you. Rather than choosing what to invest in, you choose a level of risk. Their annual fees are 0.45% for portfolios which operate without human oversight, rising to 0.75% for fully managed portfolios and socially responsible portfolios.

Investing with Charles Stanley Direct is slightly more involved, but the interface is easy to get your head around. As my knowledge has grown this has become my preferred place to invest as I have more control over which funds I am investing in. Their annual fees are 0.35% for funds, with no additional fees when buying or selling. If you plan to trade individual shares (not an investment strategy I would recommend) you’ll pay an additional £11.50 per trade. This could quickly add up if you attempt to play the market.

Step 3: Choose an Index Fund

Index funds group together a wide range of companies, meaning that you own a tiny piece of an enormous range of businesses. As a result you won’t notice an impact to your investment if a single company performs badly.

It’s important to be aware that investing always carries some risk and the value of your stocks and shares will reduce if the whole market has a downturn. However, the important thing to bear in mind is that the value only matters when you cash them in. So if you can afford to wait for the market to turn around downturns can actually be fantastic opportunities to invest more at a lower rate.

Billionaire investor Warren Buffet (one of the richest men in the world) famously made a bet in 2007 that over a ten year period an index fund would outperform money being managed by hedge fund managers. The end result? He won with his choice gaining 125.8% over ten years and the hedge funds only gaining 36% on average. This goes to show that there’s no need to strategically pick individual stocks and shares.

“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”
Warren Buffet

Vanguard Lifestrategy funds are an easy way to start investing with minimal effort. There are a range of funds available which invest in different proportions of equities (stock/ shares in a company) and fixed income securities (bonds and preferred shares). I have personally invested in the Vanguard Lifestrategy 80/20 Acc fund in the past. The 80% equities, 20% fixed income securities ratio is commonly recommended for long term investors as it has a high potential for growth but also a high risk of volatility. If you have a low risk tolerance, or expect to need access to your money in the next few years, you should choose a Vanguard Lifestrategy fund with a higher proportion of fixed income securities. The Vanguard funds have low management fees which make them particularly attractive for long term investing.

When you invest in funds it’s important to recognise that you are helping to fund the activities of any companies contained within it. Therefore in the past year I have chosen to shift my investments away from Vanguard and into ethical index funds as I wasn’t happy investing in companies which don’t align with my values (such as weapons, tobacco and fossil fuels).

Step 4: Set up Automated Payments (Dollar-Cost Averaging)

My favourite investment strategy is dollar-cost averaging. This means investing at regular intervals, rather than trying to strategically time your investments. As an example you may choose to set up an automated standing order investment of £100 every month.

This is a straightforward way to keep your investments growing over time and requires no time or effort spent analysing the market. Warren Buffet’s bet showed it’s impossible for seasoned investors to predict the future, so it’s best to invest automatically and forget about it.

Step 5: Reinvest Your Dividends

Remember all of that lovely compound interest at the top of this post? That comes by re-investing any interest you earn. You’ll start to earn interest on that interest and over time this snowballs.

When you invest in the stock market you don’t earn interest in the same way you would with a savings account. Instead, you earn dividends. These are payouts that a company makes to all of their shareholders – essentially giving you a share of the profits.

Index funds typically come in two different account types, ones ending in Inc and ones ending in Acc.

Income (Inc) – Best to choose if you’re living off of your investments as these funds pay out your dividends as cash
Accumulator (Acc) – Best to choose while you’re growing your savings as these funds automatically reinvest your dividends and buy more shares (compounding your return)

By choosing an Acc account you’ll help your investment to grow over time.

Step 6: Wait Patiently

It’s important to recognise that investing in the stock market is a long term investment strategy. There’s a significant risk that your investment may decrease in the short term, while over the long term the stock market has typically provided annual returns around 7% (adjusting for inflation). The below table from Moneywise shows the chance of stocks and shares outperforming cash over different periods of time. So the longer you plan to invest for, the more reason to invest in the stock market.

While it’s possible to grow your returns more quickly using a riskier investment strategy, it’s also highly likely that you could incur substantial losses. Index funds and dollar-cost averaging are a low risk way to grow your savings over time. With the added benefit of compound interest they’re a fantastic way to get started!