I’ve been investing for several decades now, with the aim of setting up a decent passive income stream for my retirement years. Today’s rising prices make that more important to me than ever.
So what’s my long-term approach? Here are five of my key guiding principles.
Save regularly
A friend once told me that when he got his first job, he started off saving 10% of his salary every month. As he put it, it was money he’d never had before, so he wouldn’t miss it. Then every time his income increased, up went the 10% savings slice too.
Decades later, he’s still doing it. I reckon his lifetime of saving and investment will secure him a very nice passive income stream in his retirement.
Investing regularly is a key to long-term success.
Long-term focus
That leads me to two cornerstones of my investing strategy. The first is that it’s a long-term thing. And I don’t just mean five years, or so. No, the best investing timescale for me is forever. I know, I’m not going to live that long.
But if I invest as if I could indeed live forever, by the time I need income for my retirement, I reckon I’ll almost certainly be better off than had I approached it with a shorter-term investing outlook.
Stocks and Shares ISA
The next question is where to invest the cash. For me, it has to be a Stocks and Shares ISA. In the short term, shares can be volatile, as we’ve seen over the course of several crises in the last 10 years.
But over the decades, shares tend to beat all other forms of investment. According to Finder.com, Stocks and Shares ISAs returned an average of 5.14% a year between April 1999 and April 2020. And that’s even finishing in the depths of the pandemic crash.
I mostly buy shares paying reliable dividends in my ISA. Not the one-off big payouts that might evaporate next yet, but ones that have been growing for years.
Not just dividends
Though I like dividends, I think the key measure should be a stock’s total return. My favourite example is billionaire investor Warren Buffett, whose Berkshire Hathaway investment company has returned an average of 20% per year since 1965. But it hasn’t paid a penny in dividends.
Just think of the capital sum that could be accumulated at that rate to generate future passive income. All we’d need to do is sell a few shares now and then. That’s not 100% passive. But it’s not exactly a complicated activity.
Investment trusts
Finally, when the time comes to draw down investment cash to provide passive income for my retirement, I’ll probably have most of it in investment trusts. They can even out their annual earnings to provide steady dividend income. They also provide diversification, and there are trusts offering a variety of investing strategies.
I’ll be picking from the list of Dividend Heroes put together by the Association of Investment Companies. It covers all those that have raised their dividends for 20 years or more — and I’ll go for ones with income strategies.