While investing in the FTSE 100 can be a great move when it comes to retirement savings, the reality is that it is easy to make mistakes. Here are two fairly common mistakes which most investors are likely to have made at some point. Avoiding them could help to boost your total returns and enjoy an improved retirement from a financial perspective.
High-yield shares
Whether investing during retirement or in the period leading up to it, many investors focus on the shares which offer the highest yield. While this may seem to be a logical means of generating a high-income return, in the long run it may not be the best method. That’s partly because dividend growth can matter more than current yield in the long run. A stock with a yield that is similar to the FTSE 100 but that is set to increase shareholder payouts rapidly could generate a higher income return over a five or 10-year period than a stock with a high yield now but modest dividend growth.
Furthermore, some high-yield shares are unpopular among investors due to poor operational or financial performance. This could lead to a disappointing income return if dividends are cut, or if the stocks become increasingly unloved by investors. As such, a 6%+ yield could easily be offset by a capital loss of the same amount each year. Focusing on a business as a whole, including its financial prospects, may be a better idea than simply buying the highest-yielding shares in the FTSE 100.
UK focus
While there are a number of excellent companies that are focused on the UK, the FTSE 100 provides investors with the potential to invest in stocks that are internationally-oriented. Many investors, though, choose companies that they know from their daily lives, or whose products they use regularly. While there is no harm in buying familiar stocks, the reality is that the growth potential of the world economy is likely to remain higher than that of the UK economy over the coming years. This could provide investors with stronger rates of profit growth should they look outside of the UK economy.
This point is perhaps especially relevant due to the risks involved in the Brexit process. Although there is still time for a deal to be signed between the UK and the EU, the reality is that a no-deal scenario is becoming increasingly likely.
Clearly, nobody knows exactly how a no-deal Brexit will progress, and it could even prove to be a positive thing for the UK economy in the long run. However, in the short run it could mean that volatility and uncertainty rise, with the potential for declining investor sentiment towards UK-focused shares. As such, investing in a broad range of companies with exposure to different geographies could be the best way of investing retirement savings in the FTSE 100.
