I really wish I’d learned about stock market investing a lot sooner. In the miracle of compound returns, early years make a lot more difference than later years, and the size of the difference can be surprising.
Suppose you start at age 30 and stash away £500 per month, and let’s say you earn an average annual return of 6% (including dividends, which you reinvest). I reckon 6% is well within reach, especially now the FTSE 100 as a whole is offering dividend yields of 4.2%, and with a bit of luck I think you can do better than that.
Half a million
But let’s stick with 6% for now, run it through a spreadsheet, and see how much you could accumulate by age 60… Right, I’ve done that, and after 30 years it seems you’d be the happy proprietor of a £489,600 nest-egg (to the nearest £100).
That’s a handsome sum to start off your retirement, but what if you’d started at age 20 instead? You’d have, wait for it… £958,500. Investing for the extra 10 years, for 40 years instead of 30, would result in 96% more cash — almost double the amount, for a period just a third longer.
And if you could manage an 8% return every year, 30 years of investing would net you £708,800, but the decade in your 20s would bump that up to £1,620,900 — more than two-and-a-quarter times the cash by adding an extra 10 years.
Investment trusts
Now, when I was in my 20s, I didn’t have any clue what to invest in (and when she looks at my portfolio, my wife sometimes reckons I still don’t), but that shouldn’t stop you.
One thing to do is go for an index tracker fund, which just follows, say, the FTSE 100. But I prefer more control, and I’m very much a fan of investment trusts. Such a trust invests a fixed sum of cash using its chosen strategy, and you get in by buying shares in it — you don’t have separate company owners taking a slice of the profits, because investors are the owners.
If you start in your 20s, you have enough time to go for something risky if you want, like the Woodford Patient Capital Trust, which is in the news for the wrong reasons right now. Its strategy is volatile, yet it could be a long-term winner.
But I’d look for dividend-paying trusts with the best track records — specifically seeking out reliable and rising dividends that I’d reinvest regularly. And some have very impressive records indeed, as investment trusts are able to set aside up to 15% of their annual income to keep the cash going in tougher years.
Best records
The Association of Investment Companies has identified four investment trusts that have kept their dividends growing annually for more than 50 years in a row. The leaders, the City of London Investment Trust, Bankers Investment Trust and Alliance Trust, have managed the feat for 52 straight years, followed by Caledonia Investments on 51 years.
City of London focuses on UK equities, while the other three are global in outlook, and there are plenty of investment trusts out there with more specific strategies.
I reckon investment trusts are a great way for 20-somethings to get started in long-term investing.