How Investment Returns Work
Investment returns compound over time — meaning growth is earned on both your original investment and all previous gains. This compounding effect is why starting early matters so much more than the amount you start with.
The Real Cost of Fees
Fund fees (expressed as a Total Expense Ratio or TER) reduce your effective return every year. A 1% annual fee sounds small, but on a 30-year investment at 7% growth it can consume more than 20% of your final portfolio. Modern index tracker funds are available for 0.07–0.25% per year, making fee minimisation one of the highest-impact decisions you can make.
Nominal vs Real Returns
A nominal return is your raw portfolio growth. A real return strips out inflation to show your actual increase in purchasing power. If your portfolio grows 7% and inflation is 2.5%, your real return is approximately 4.4%. Over long periods, only the real return tells you how much wealthier you have actually become.
Lump Sum vs Regular Investing
Investing a lump sum immediately puts all your money to work. Regular monthly contributions use pound-cost averaging — you automatically buy more units when prices fall and fewer when they rise. Both are valid strategies. If you have a lump sum available, investing it immediately tends to outperform drip-feeding about two thirds of the time, because markets rise more often than they fall. To understand how inflation eats into your real return over time, use the Inflation Calculator. For tax-free investing, see how the same returns look inside an ISA with the ISA Calculator.
Frequently Asked Questions
What is a realistic investment return in the UK?
UK equities have historically returned around 7–10% per year nominally, or 5–7% in real terms, over the long run. A globally diversified index fund has historically delivered similar figures. After fees of 0.2–0.5% on a modern tracker fund, 7% nominal is a commonly used planning assumption. Past performance does not guarantee future results.
What is the difference between nominal and real returns?
A nominal return is the raw percentage gain on your investment. A real return strips out inflation to show your actual increase in purchasing power. If your investment returns 7% and inflation is 2.5%, your real return is approximately 4.4%. The real return is what matters for long-term wealth preservation.
How much do investment fees actually cost?
Fees compound just like returns — but in reverse. A 1% annual fee on a £10,000 investment over 30 years at 7% growth costs you around £18,000 in lost returns compared to a 0.2% fee fund. Minimising fees is one of the highest-impact decisions an investor can make. Use this calculator's fee comparison panel to see the exact cost for your scenario.
Is it better to invest a lump sum or drip-feed monthly?
Mathematically, investing a lump sum immediately tends to outperform drip-feeding about two thirds of the time, because markets rise more often than they fall. However, drip-feeding reduces the risk of investing at a market peak and is more psychologically manageable. If you already have the cash, lump sum is usually optimal. If you are investing from monthly income, regular investing is the practical choice.
What annual return should I use for planning?
For a globally diversified equity portfolio, 7% nominal per year is a commonly used long-term assumption. For a balanced portfolio (60% equities, 40% bonds), 5–6% is more typical. For cash or bonds only, 3–4% is reasonable. Always model conservative scenarios as well — try 4–5% to see a lower-bound estimate.
How does tax affect investment returns in the UK?
Outside an ISA or pension, investment gains are subject to Capital Gains Tax and dividend tax. Inside a Stocks & Shares ISA, all growth and income is completely tax-free. Inside a pension, contributions receive income tax relief and growth is tax-free. For most UK investors, maximising ISA and pension allowances before investing in taxable accounts is the priority. See our
ISA Calculator to model tax-free growth.