The Motley Fool

No savings at 40? I’d use the Terry Smith method to get rich and retire early

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Old empty wallet in hands.
Image source: Getty Images

Terry Smith could have retired years ago if he’d wanted to. As one of the UK’s most successful fund managers, however, his investors will be glad he didn’t. In just 10 years, Smith has grown his Fundsmith Equity Fund into a £21bn behemoth. 

I think everyone could benefit from listening to the main man. In fact, I’m a firm believer that anyone beginning their investing journey in their 40s could still retire early by adopting his methods. 

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Terry Smith buys quality

Smith is a quality investor and focused on buying great companies. But what makes a company great?

You might think it’s all about rising profits. Smith, however, prefers to focus on a company’s Return on Capital Employed (ROCE). This is what it makes from the profits put back into the business to help it grow. The higher the percentage, the better. The average ROCE across Fundsmith’s portfolio is around 29% compared to the FTSE 100’s 16% or so.

Of course, Smith wants more than just a high ROCE. The cycling enthusiast seeks out companies that have “already won” and occupy a dominant position in their markets. 

He also looks beyond the London Market. As tempting as it is to ‘back what you know’, I think new investors should do the same. In addition to providing some protection from things like Brexit, opening your portfolio to high-growth overseas stocks can generate a far better return, as Fundsmith has shown.

Avoid high-income stocks

Terry Smith isn’t an advocate of income investing. Instead of distributing profits out to owners, he’s looking for companies that have a better use for the cash. 

This is an important point to grasp if, like me, you’re in your 40s. With many years left in my stock market journey, I’m reinvesting whatever I receive back into the market without exception.

Not spending what I receive ensures I’m taking advantage of compound interest as much as I possibly can.

Don’t obsess over prices

Most investors pay too much attention to valuations, according to Smith. The price you pay is important, of course, but it’s what the business does over time that really matters.

In a brilliant presentation, Fundsmith’s CEO explained how anyone paying as much as 32 times earnings for US drinks giant Pepsico and holding for years would still have beaten the return from the S&P 500 index.  

As a 40-something new investor, it might be tempting to buy nothing but screamingly cheap stocks in an effort to ‘catch up’. Some may even be tempted to throw everything they have at massively-hyped penny shares. Terry Smith’s performance over the years shows this level of risk-taking isn’t required.

Ignore the noise

Sure, Smith is successful because he’s a great stock-picker. However, he’s also successful because he cares little for what the global economy is doing at any particular time. This aversion to market timing means Fundsmith has incredibly low portfolio turnover. By minimising transaction costs, Smith therefore retains more of his profits. 

As someone in my 40s, I try to adopt a similar approach. Even when I do purchase shares, I normally take advantage of my broker’s regular investment plans. Buying on a fixed day in the month can actually reduce commission costs to zero! 

Save money where you can and retiring early need not be a pipe dream.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Paul Summers owns shares in Fundsmith Equity Fund. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.