Ten steps to financial freedom: Invest! Seriously, it's simple

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Invest! Seriously, It's Simple

What would you do if we said you were missing out on an investing strategy that, in the long run, has produced returns that far outweigh those offered by a building society? One that outperforms cash in a deposit account or bonds? Well, meet the stock market.

Internet bubble and credit crunch included, over the last 90 years or so, the UK stock market has returned an average annual rate of around 11%, outperforming bonds and cash in a deposit account by around 5% to 6% a year. Although recent falls have shaken many people's belief in shares they also do pretty well over shorter periods too. For example, over period of five years, the returns from shares have historically beaten cash around 80% of the time. Over ten years, this rises to about 90%, and for twenty-year periods, it's 98%. With odds like that, investing for the long term remains one of best ways of building your wealth.

Investing in the stock market can be financially savvy, simple, and inexpensive.


Investing in the stock market: funds vs. shares

You can invest in the stock market by buying shares in an individual company, or by investing in a fund, which consists of a variety of shares in different companies – sort of like a basket of shares. With shares, as the value of the share itself (a publicly-traded company) goes up or down, the value of your investment does the same. With funds, the value of your investment is tied to the value of the fund, which is reflective of the value of the shares the fund is comprised of. It follows that one share's movement has a smaller impact on the fund as a whole, and thus on you, than it would if you had all your money tied up in that share alone. You do pay a price for the relative stability of funds, and that's the fund management fee – all funds have these.

Perhaps the biggest challenge with the stock market is knowing what to buy, when to buy it and when to sell it. This is where our two stock picking newsletters can help.Dividend Edge is focused on picking high yielding shares, while Champion Shares PRO leans towards digging out bargains about smaller companies. Both are 'real-money portfolios' meaning we have invested a portion of the Fool's cash to demonstrate how each strategy works in practice.

Introducing the index tracker

Individual shares and funds not to your tastes? The index tracker might be your best investment option. An index tracker is a fund that copies one of the main stock market indices (like the FTSE 100, for example) so that by buying into a tracker, you can buy the overall market without having to pick individual shares. The FTSE 100 contains the hundred largest companies on the UK market, with each company weighted according to its market value. This means movements in large, usually more stable companies like BP, GlaxoSmithKline and Vodafone affect the FTSE 100 index much more than smaller companies.

Index trackers charge less than other funds. A good index tracker will cost you 0.5% a year in charges whereas a managed fund, where a fund manager chooses shares for you, will set you back around 1.5% a year, plus an initial charge of 5% for investing your money in the first place.

Our share dealing service

If you're interested in investing then you'll want a low-cost share dealing service to keep your trading costs down. This is where The Motley Fool's Share Dealing service can help. You can buy and sell for just £10 or set up a regular purchase plan for £1.50.

Further reading on investing

As a rule, the longer you invest for, the greater the chance that you'll do well. Investing for the short term, which we would describe as less than five years, is certainly risky. But when you're investing for your retirement you can afford to be a bit more patient.

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