The idea of hanging up one’s working hat early appeals to a lot of people. There are different ways to try and do that. If I wanted to retire early, one approach I would take is investing in shares. If they generated income and grew in value, hopefully that could help me build a pot of money that might let me clock off work — years early.
Why I’d buy a range of shares
People sometimes wish they had invested in an Amazon or Microsoft years ago, in which case that one pick alone might have been enough to fund an early retirement.
For every incredible success story, though, there are other promising companies that end up doing just okay — or worse. So I would want to diversify my investment across a range of shares.
Focus on capital conservation
If I put money into an investment pot, ideally it would grow and maybe also generate dividends. But at a bare minimum, I would hope to be able to take out what I put in.
That is never guaranteed, but it does explain why if I was hoping to retire early, I would focus on minimising my downside risk over maximising my potential gain. As Warren Buffett says about investing, rule number one is never lose money — and rule number two is to never forget rule number one!
What does that mean in practice, given that share prices can always go down as well as up?
If my focus was to retire early, I would steer clear of growth stocks without a proven ability to make consistent profits, such as Nio and ITM Power. Instead I would focus on companies with a proven business model I think have the assets to keep making profits.
5 shares I’d buy
In practice, that means a few things.
I would want the company to be operating in a market I expected to see significant sustained customer demand. My focus would be on firms with some competitive advantage. I would also want the shares to be trading at an attractive price.
If I was to buy five such shares right now for my portfolio, they would be consumer goods firm Unilever, financial services group Direct Line, cigarette maker British American Tobacco, retailer Dunelm, and timber merchant Howden Joinery.
How I’d plan to retire early
Those five shares all face risks. Cost inflation could hurt profits, for example. Long-term decline in cigarette use might damage sales at British American Tobacco, while a housing downturn could sap customer demand at Howden. As I said above, no share is risk-free.
But I think all five companies could see sustained customer demand in the long term. They have proven business models and strong brands. They also all currently pay dividends, with an average yield of 5.9%.
If I invested a lump sum evenly across those five shares today and compounded the dividends for the next two decades or more, hopefully that 5.9% yield would mean my money grew and grew.
Given the strength of the firms, over the long term I would also be hopeful for capital growth. Anything can happen. But if dividends kept flowing for me to compound, and share prices moved up over time, hopefully my growing investment pot could help me retire early.