Do you know your A-Z of long-term investing
Keen to learn more about the terms associated with long-term investing? This A-Z of long-term investing is your ultimate reference, covering everything from time-tested strategies to tax-efficient vehicles, and emotional pitfalls to avoid.
Related reading
- The benefits of long-term investing in ISAs and pensions
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What are the most tax-efficient investments for high earners?
A is for Asset Allocation and Alternative Investments
Asset Allocation
The strategic distribution of investments across asset classes (e.g., equities, bonds, property, cash) to balance risk and return according to your financial goals and time horizon.
Alternative Investments
Investments outside of traditional stocks, bonds, or cash, such as real estate, private equity, hedge funds, infrastructure, and commodities. Often used by high-net-worth investors to diversify and enhance returns.
B is for Bear Markets and Bonds
Bear Market
A period when markets decline 20% or more from recent highs. Bear markets test emotional discipline but are normal in long term investing cycles.
Bonds
A fixed income investment where investors lend money to an entity (corporate or government) in exchange for regular interest payments and the return of principal at maturity.
C is for Capital Gains, Compounding and Corrections
Capital Gains Tax (CGT)
Tax is charged on the profits made from selling an asset that has increased in value. Tax wrappers like ISAs and pensions shield long-term investors from taxes like CGT, making them crucial for a long-term strategy.
Compounding
The process where earnings (from dividends or interest) generate their earnings via interest building and accumulating over time. Over long periods, compounding often leads to exponential wealth growth.
Correction
A market decline of 10–20% from recent highs often provides opportunities for long-term investors to buy assets at lower valuations.
D is for Diversification and Dividends
Diversification
Spreading investments across a variety of asset classes, sectors, and geographies to reduce risk. A diversified portfolio smooths returns and protects against isolated market events.
Dividends
Payments made by companies to shareholders, usually derived from profits. Reinvesting dividends is a major source of compounding in long-term investing.
E is for Equities and Exit Strategies
Equities
Ownership stake in a company, typically represented through shares of stock. Equities are considered key to long-term capital growth.
Exit Strategy
A pre-planned method of liquidating an investment to realise gains or limit losses. Essential for private equity, venture capital, or alternative investments.
F is for Funds and Financial Advisers
Fund
A pooled investment vehicle (e.g., mutual funds, ETFs) that offers exposure to a diversified basket of assets, often aligned to long term goals like retirement planning.
Financial Adviser
A financial adviser is a professional who provides strategic advice on investments, tax efficiency, retirement planning, and behavioural coaching to improve long-term outcomes.
G is for Growth Investing and Gilts
Growth Investing
An investment strategy focused on companies expected to grow revenues and profits faster than the market. Often involves accepting higher volatility for greater long-term potential.
Gilts
UK government bonds are issued to fund public spending. Considered low-risk, they provide fixed income and are commonly used in long-term portfolios to reduce volatility.
H is for Herd Mentality and High Net Worth Individuals
Herd Mentality
The tendency of investors to follow the crowd rather than making independent decisions often leads to buying at market tops and selling at market bottoms.
High Net Worth Individual (HNWI)
A HNWI is an individual with significant investable assets (typically over £1 million) requiring bespoke investment strategies, advanced tax planning, and access to alternative investments.
I is for Inflation and ISAs
Inflation
The rate at which prices for goods and services rise over time. Long-term investing must outpace inflation to protect and grow real purchasing power.
ISA (Individual Savings Account)
A tax-efficient UK investment account that shelters capital gains and income from tax, making it ideal for building long-term, tax-free wealth.
J is for Junk Bonds, Junior ISAs and Joint Accounts
Junk Bonds
High-yield, high-risk corporate bonds with lower credit ratings. May offer attractive returns but carry a higher risk of default, unsuitable for conservative long term portfolios.
Junior ISA
A tax-free savings and investment account for children under 18 in the UK. Contributions are capped annually (£9,000 in 2024/25) and investments grow free of income and capital gains tax.
Joint Investment Account
An account held by two or more individuals to manage pooled investments. Used by couples or business partners, joint accounts can offer flexibility in estate planning and income distribution, but come with implications for CGT and inheritance.
K is for Knowledge Investing and KIIDs
Knowledge Investing
An investment approach based on informed, research-driven decisions rather than speculation or reacting emotionally to market movements.
Key Investor Information Document (KIID)
A mandatory document that outlines the essential facts about a fund, including charges, objectives, risk rating, and past performance.
KIID Risk Scale
A standardised 1–7 risk rating used in KIIDs to help investors understand a fund’s volatility profile.
L is for Liquidity and Lifetime Allowance
Liquidity
The ease with which an asset can be quickly bought or sold without impacting its price. Long-term investors often sacrifice liquidity for higher potential returns in illiquid assets like private equity.
Lifetime Allowance (Historical – UK)
Previously, the limit on the amount you could accumulate in pensions tax-efficiently. Now abolished (as of 2024), but historical relevance remains for pension strategies.
M is for Market Timing and Mutual Funds
Market Timing
Attempting to predict short-term market movements to buy low and sell high. Proven extremely difficult even for professionals; generally inferior to a disciplined long term strategy.
Related reading: Time in the market vs timing the market
Mutual Fund
An investment fund that pools money from many investors to invest in a diversified portfolio of securities, managed by a professional fund manager.
N is for NAV and Nominee Accounts
NAV (Net Asset Value)
The total value of a fund’s assets minus liabilities, divided by the number of shares outstanding. Critical for valuing fund investments.
Nominee Account
An account where a third party holds shares on behalf of the true owner, used for convenience in stockbroking and investment platform services.
O is for Overconfidence Bias and Opportunity Cost
Overconfidence Bias
A behavioural bias where investors overestimate their knowledge or ability to predict markets, often leading to excessive risk-taking and underperformance.
Opportunity Cost
The cost of choosing one investment option over another, potentially more profitable one, is especially important when allocating capital for the long term.
P is for Pensions and Private Equity
Pension
A retirement savings plan offering upfront tax relief, tax-free investment growth, and flexible income options at retirement — a foundation for long-term financial security.
Private Equity
Investments in private (non-listed) companies, often illiquid and higher risk, but offer potentially higher returns for sophisticated, patient investors.
Q is for Quantitative Easing
Quantitative Easing (QE)
A monetary policy tool used by central banks to inject liquidity into the economy, often influencing asset prices and interest rates, and indirectly impacting long-term portfolios.
R is for Rebalancing and Risk Tolerance
Rebalancing
The process of realigning a portfolio’s asset allocation back to its original targets by buying or selling assets. Maintains risk control and investment discipline over time.
Risk Tolerance
The degree of variability in investment returns that an investor is willing to withstand. Essential for matching portfolio strategy to emotional and financial capacity.
S is for Short Term Investing and Stocks and Shares ISAs
Short-Term Investing
Strategies aimed at making quick profits within days, weeks, or months. Typically high-risk, high-stress, and generally less tax-efficient than long-term investing.
Stocks and Shares ISA
A type of ISA that allows investments into equities, bonds, funds, and other securities — ideal for tax-efficient, long term wealth accumulation.
T is for Time in the Market and Tax Efficiency
Time in the Market
The principle that staying invested consistently over long periods produces far better returns than trying to time market entries and exits.
Tax Efficiency
Structuring investments to minimise taxes and maximise after-tax returns. Core strategies include using pensions, ISAs, and strategic asset location across accounts. Tax-efficient investments are key for those seeking to build wealth while mitigatying taxes.
U is for Underperformance
Underperformance
When an investment fails to meet its benchmark or expected return, often due to poor stock selection, excessive fees, or behavioural mistakes.
V is for Venture Capital Trusts (VCTs)
VCT (Venture Capital Trust)
A UK investment vehicle offering generous tax reliefs for investing in small, high-risk companies. Suitable for high-net-worth investors seeking tax efficiency and portfolio diversification.
W is for Wealth Managers and Withdrawal Strategies
Wealth Manager
A financial professional specialising in integrated investment, tax, estate, and retirement planning for affluent individuals and families.
Withdrawal Strategy
The plan for converting investments into retirement income — balancing sustainability, tax efficiency, and legacy goals over the long term.
X is for XIRR
XIRR (Extended Internal Rate of Return)
A method of calculating an investment’s annualised return considering irregular cash flows, providing a more accurate real-world picture of investment performance.
Y is for Yield
Yield
The income (dividends or interest) an investment generates, expressed as a percentage of its market price, is important for investors seeking income alongside growth.
Z is for Zero Coupon Bonds
Zero Coupon Bond
A bond is sold at a discount to its face value but pays no regular interest. It matures at full face value, offering a lump sum profit instead of periodic payments.
