Planning for retirement can be a challenging process. However, buying shares for the long term, rather than holding cash or bonds, could mean that you enjoy higher returns which bring retirement a step closer.
Moreover, by adopting a value investing strategy that enables you to capitalise on the cyclicality of the stock market, you can boost your returns.
Furthermore, with there being a number of sectors that appear to offer strong growth prospects in the long run, now could be the right time to start planning for your retirement.
Asset classes
While holding cash and investing in bonds may be less risky options compared to the stock market, shares can produce relatively high returns in the long run. In fact, indexes such as the S&P 500 and FTSE 100 have recorded high single-digit annual total returns over the long run. By contrast, low interest rates at the present time mean that cash and bonds may fail to deliver a significant positive real-terms return.
As such, if you have a long time period until you aim to retire, focusing your capital on the stock market could be a sound move. It may produce more volatile returns in the short run – as the recent stock market pullback highlights – but could increase your chances of retiring early.
Market cyclicality
Adopting a value investing strategy may enhance your overall returns. Value investors such as Warren Buffett have sought to capitalise on the cyclicality of the stock market through buying during downturns. Such periods occur on a surprisingly regular basis, with investor sentiment being subject to major change without prior notice.
Through buying high-quality shares while they trade on low valuations, you may be able to obtain a favourable risk/reward ratio which improves your chances of retiring early. Certainly, such a strategy can lead to paper losses in the short run. But by focusing on the long run and buying while other investors are concerned about the short term prospects for the stock market, you can increase the future value of your retirement nest egg.
Growth sectors
Determining which sectors will produce high returns in the long run is challenging. After all, nobody knows what the global economy will look like in the coming years, or how it will perform.
However, a number of sectors currently appear to offer as relatively high chance of delivering impressive returns due to their favourable outlooks. For example, healthcare is likely to enjoy high levels of demand due to a rising and ageing world population. Similarly, online retail seems to be becoming increasingly popular in a wider range of economies, while sectors such as financial services appear to offer stocks that trade on wide margins of safety in many cases.
Through investing in sectors that seem to offer favourable risk/reward ratios, you can increase your chances of building a retirement portfolio which grows at a relatively fast pace and enables you to enjoy financial freedom in older age.