The prices of stocks and shares dropped last week. But to me, this is a good opportunity to begin a programme of investing £40 a week to build passive income streams.
There are many ways to get unearned, passive income. But one of the most accessible is to invest money in dividend-paying shares. I also think it’s one of the best and most effective ways.
And a lifelong approach to regular investing has the potential to make a big difference to my personal finances. For example, if I’d started at the age of 20 and carried on until the age of 60, the money could have transformed my finances in retirement.
If starting now, my approach would include rolling that passive income stream of dividends back into my investments along the way. And that would help with the optimisation of the compounding process.
The power of compounding
I punched the figures into an online calculator. The results are impressive. £40 a week works out at about £174 a month. And for the purpose of the calculation, I assumed an annualised return of 7%. The long-term total return of the overall stock market is somewhere in that ballpark. Therefore, the figure makes sense. However, it’s not guaranteed.
Nevertheless, earning an average of 7% a year for 40 years while investing £174 a month produces a sum of £432,643 according to the calculator. And that would be ample money to enable my early retirement at the age of 60. That £40 a week would be worth it.
However, the amazing thing is the total investments made over 40 years would add up to just £83,520. The remaining £349,123 occurs by simply building returns upon returns each year — such is the awesome power of the compounding process.
And I think periods of market weakness can be good times to begin. If we get a decline in the stock market of 20% or more, the setback gets labelled as a bear market. And they tend to occur every few years. Brad McMillan — chief investment officer for Commonwealth Financial Network — recently said the current decline is no different to others before it.
Potential to bounce back
He wrote that significant falls are a “regular and recurring” feature of the stock market. And “like every other decline, we can reasonably expect the markets to bounce back at some point.”
Meanwhile, I reckon there’s opportunity in that expectation. And that’s because buying shares now means there’s a good chance my investment will grow when those shares bounce back. All as McMillan expects.
However, such outcomes are never certain. And all shares carry risks as well as positive potential. Nevertheless, I’d begin my programme of investing £40 a week immediately. And I’d target widely diversified tracker funds alongside the shares of carefully chosen dividend-paying stocks and shares.