A former investment banker and personal finance expert, Nischa Shah, shared insights during her YouTube channel on a pressing question she often encounters: “I have some spare cash, how should I invest it to grow its value?” The investment market can be quite overwhelming for beginners, and she addressed the seven essential questions that novices need to understand in her program.
Nischa presented two key reasons for why individuals should consider investing their idle cash.
The first reason pertains to inflation. Over time, prices tend to rise, which means that the purchasing power of a given amount of money diminishes slightly every year – this is what we term inflation. Most central banks around the globe aim to maintain an inflation rate of about 2% annually; however, recent years have seen rates exceed this target significantly. Many people mistakenly believe that stashing cash in a bank account is a safe option, unaware that its value is continuously eroding. Historically, stock markets have outpaced inflation, with the average annual return of the top 500 companies in the United States (represented by the S&P 500 index) being around 8% to 10%, which translates to about 7% after accounting for inflation.
The second reason is quite fundamental: money can generate more money. Investments yield returns, which subsequently generate additional returns – this principle is known as compound interest. For instance, if you invest $1,000 and achieve an 8% growth rate, you now have $1,080. In the following year, your 8% yield is computed on the $1,080 rather than the initial $1,000, leading your funds to grow to $1,166. This compounding effect continues over time. If you allow the investment to remain untouched for 20 years, it could burgeon to $4,660. Now, consider if the initial investment was $1 million; by the first year, assuming the same 8% earning, you would gain $80,000 in interest. Hence, the greater your investment, the more your money can earn for you.
Nischa elaborated on the concept of stock ownership, explaining that purchasing a share means that you own a small part of a company. If that company grows and earns more profit, the value of your share appreciated accordingly. Based on this understanding, she laid out three reasons to recommend investing in the stock market.
For starters, the barriers to entry are low. Unlike real estate investments which typically require hefty down payments, many investment platforms now allow individuals to start with amounts that are less than the cost of a loaf of bread.
Secondly, stocks offer greater liquidity. For example, if you purchase a property outright, liquidating that asset could take several months; however, if you invest in stocks like those of Apple, you can buy in the morning and sell by the afternoon. This liquidity in the stock market far surpasses that of real estate.
Thirdly, historical data spanning several decades indicates that stock markets have maintained relatively stable performance. If you had invested $100 in the S&P 500 in 1980 and reinvested the dividends, that investment would now be worth approximately $21,500. Considering inflation, the purchasing power of that $100 from 1980 equates to about $400 today. Therefore, even after adjusting for inflation, the appreciation realized is still over 50 times the original investment.
To get started with investing, first, you will need an investment account. Nowadays, you can set up an account in a matter of minutes using an investment platform on your smartphone. The type of account you choose primarily depends on your location, but the fundamental concepts are generally similar across regions. Nischa identifies three types of accounts that beginners should familiarize themselves with.
The first is your workplace retirement plan. In some countries, when you deposit funds into a retirement account, your employer will fully or partially match your contributions. For instance, if you earn £40,000 annually and your employer offers a maximum match of 5%, when you contribute £2,000 each year, your employer adds another £2,000 in “free” money on top of that. It’s crucial to ensure that you contribute enough to benefit fully from employer matching; this also often comes with tax incentives, though these funds typically cannot be accessed until retirement.
The second type is tax-advantaged investment accounts. Generally, earnings from investments or dividends face taxation; however, within tax-free accounts, the profits you generate from investments are entirely exempt from taxes. In the UK, such an account is termed a Stocks and Shares Individual Savings Account (ISA); in the U.S., it’s known as a Roth IRA; while in Canada, it’s called a Tax-Free Savings Account (TFSA). If you reside in a different country, it’s advisable to check if similar accounts are available.
Once the limits of the first two account types are exhausted, the third option is a standard investment account. While these accounts do not offer tax benefits, they come with fewer restrictions regarding deposited amounts or withdrawal timelines. Consequently, in terms of investment prioritization, it’s advisable to utilize employer-matching funds first, followed by tax-free accounts, and only then consider regular accounts.
Investment strategies vary widely; the first option involves selecting individual companies. If you’re knowledgeable in this area, it can be a viable approach, but it requires extensive time and research and carries significant risks. For instance, in 2008, many individuals invested in BlackBerry Limited, whose share price peaked at $147; today that same stock trades at around $9. In contrast, at the same timeframe, the S&P 500 index saw gains exceeding five times. Nischa warns that if you choose to invest in individual stocks, only allocate a small portion of your portfolio to these ventures, treating it as “entertainment money.” While there’s a chance for high returns, the risks accompany them.
Nischa recommends index funds as a second option. A fund typically aggregates money from multiple investors to allow for professional management. But if a professional manager selects the investments, you’ll incur fees for their expertise, which can diminish your returns. This is known as an actively managed fund. In contrast, index funds replicate a list of companies rather than selecting individual stocks. For example, the S&P 500 index consists of the top 500 U.S. companies, while the FTSE 100 index represents the top 100 companies listed on the London Stock Exchange. Most countries have their own index which anyone can invest in. Index funds generally have lower fees, and with just one purchase, your funds are diversified across all companies in that list. By investing $500 monthly in an index fund that averages an 8% annual return, you would accumulate approximately $1.15 million after 35 years, with only $210,000 being your initial investment.
Nischa discloses that she personally diversifies her investments across various countries, company sizes, and sectors to mitigate risks.
Many individuals express to Nischa that they are waiting for the stock market to decline, given that it currently stands at historic highs. However, since 1950, the S&P 500 has hit new all-time highs on approximately 7% of all trading days. Historically, markets that reach new highs often continue to set records. An analysis by JP Morgan of S&P 500 data since 1988 has revealed that if you invest on any randomly chosen day, the average return one year later hovers just below 12%. If you invest solely on days when the market closes at a new high, the average one-year return climbs closer to 15%. Hence, the real factor that could cause losses isn’t when you enter the market but whether you choose to participate at all.
In fact, several articles have analyzed the performance of the S&P 500 from 1996 to 2025, showing that missing just the 10 best performing days over three decades could halve your returns. Should you miss the top 30 days, returns could plummet by 84%. Yet, no one can anticipate when these peak days will occur – the most effective strategy is to invest in the stock market for the long haul.
So, how should you allocate your funds? Imagine you possess $10,000; you can either invest the entire amount at once or opt for monthly contributions of $1,000. When stock prices are high, that $1,000 will buy fewer shares; likewise, when prices are low, you’ll acquire more, which balances out your average cost. Research by Vanguard indicates that a lump-sum investment outperforms in roughly two-thirds of scenarios because markets tend to rise more frequently than they drop. Yet, spreading out your investments can be psychologically and emotionally easier to digest. Regardless of the method chosen, both options are preferable to holding cash. Ultimately, pick an investment strategy you feel comfortable with.
Nischa emphasizes that the focus should not be on how much you earn but rather on how you manage your incoming funds. There isn’t a specific income threshold you must meet to begin investing. Instead, it hinges on two important factors. First, ensure you have paid off all high-cost debts (with interest rates exceeding 8%). Second, prepare an emergency fund, starting with enough to cover a month’s worth of essential expenses, ramping up to three months, and then six months.
As for the portion of your salary allocated to investments, aim to use around 10% to 20% of your after-tax income for future savings and investments. If this proportion seems high right now, just start with a smaller amount and gradually increase it. Nischa advocates for automatically transferring a fixed percentage of your salary into your investment account on payday, ensuring you save before spending. For individuals with fluctuating incomes, reassessing monthly to see if you can add to your investments or if you need to reduce your percentage can be beneficial.
Nischa asserts that no matter the amount you’re able to invest, it’s vital to cultivate the habit of investing and acquire the necessary skills. Starting small is often easier; the losses incurred would be minimal.
The biggest risk in investing usually doesn’t originate from the market itself but rather from your actions. Understanding your investment profile requires clarifying your investment time horizon. If you plan to need funds within the next five years – perhaps to purchase a home, plan a wedding, or buy a car – it’s advisable to hold the money in cash and refrain from investing, as short-term investments can experience considerable volatility. Thus, goals set for five years or longer mark the appropriate time to begin considering investments.
Secondly, assess your risk tolerance. Typically, the younger you are, the more risk you can manage since time is on your side. You have the capacity to ride through market fluctuations, as well as the ability to recover from a challenging year with your salary. Conversely, as you approach retirement, safeguarding your accumulated assets becomes crucial. One way many people achieve this is by investing in bonds, which, although they grow slower than stocks, typically offer greater stability.
When planning your bond allocation, Nischa suggests employing a straightforward rule: round your age to the nearest ten and subtract ten, which gives a rough estimate of the percentage you might consider investing in bonds. For instance, at age 30, a bond allocation of 20% is suggested; at 58, round up to 60, subtract ten, equating a 50% allocation to bonds. This serves as a foundational guideline, which you can customize as you gain more investing experience.
Lastly, remain realistic. An average return of 8% doesn’t mean your returns will be precisely 8% every year; some years will see substantial gains, others large losses, and some may remain flat. Accepting that the stock market is volatile is essential, but when viewed from a long-term perspective, it’s clear that the market rewards patience.