The government keeps moving the goalposts for receiving the State Pension. My father got his when he was 65. I’ll have to wait until I’m 67. Some of those born after me will wait even longer.
But I’ll retire earlier than that and finance my lifestyle with the money I’ve built up by investing in shares. And you can do that too.
Dialling down the risk
Some folks shun the idea of investing in shares because they think the stock market is risky, or because they don’t believe they have enough knowledge about investing. And it’s true that you can sometimes make big gains with the shares of individual companies, and it’s also possible to lose a lot too.
However, there are ways you can dial down the risk of losing. Careful stock-picking is one method, but it requires a lot of time and a keen interest in the process of investing. Generally, I reckon it’s a good idea to focus on the shares of companies with high-quality businesses and to steer clear of speculative shares.
You can usually identify a speculative proposition because it tends to have an enticing ‘story’ and little to show in immediate profits. And as for shareholder dividends, forget it! So, I’d avoid those attractive-looking get-rich-quick speculative shares like the plague.
Yet even if you only deal in quality companies, there could still be too much risk in your portfolio if you pile into just two or three names. Another popular method of aiming to control risk is to diversify across several names – perhaps between 10 and 20 shares, for example.
Overcoming a lack of time and knowledge
If you are keen to learn all about investing and to make the process a time-consuming hobby, I’d say, “dive right in!” But you don’t have to go about it in that manner to achieve great results. There’s another way that I reckon deals with the risks, the lack of knowledge you might have, and with the desire to live a life filled with things other than investing.
Over the long haul, the stock market tends to rise to keep up with inflation – even though the indices wiggle about a bit. The FTSE 100, for example, might go up and down, but if you scope back decades, you can see the overall trend is up.
That makes sense because when inflation hits, companies raise their selling prices to compensate, which raises turnover and profits. And the market capitalisations of those firms will tend to rise gradually to maintain the valuation.
So, the entire stock market can be a good vehicle for compounding your money even if you don’t want to put lots of time into managing your investments and buying individual shares.
I’d put regular money into low-cost index tracker funds, which will be backed by hundreds of individual companies – thus providing excellent diversification. If you select the accumulation versions of your chosen tracker funds (rather than the income versions), your dividend income will be ploughed back into your fund holdings automatically.
In that way, you’ll be on the path to compounding your investment, which could grow sufficiently over time to fund your retirement earlier than the State Pension age.