Forty is a nice age to be. It combines much wisdom and experience with enough youth to do almost anything we may want to do. I loved my forties!
But life leading up to 40 can be expensive. People often have children, mortgages, busy lifestyles and other money commitments. So it’s not unusual to skid into our forties with zero savings.
Almost three decades to compound!
However, all is not lost. At 40, there’s still the biggest part of three decades before most of us can claim our State Pension for retirement. And that’s a useful amount of time for compounding investments with the aim of building a pot of money to add to the government’s retirement provision.
And let’s face it, the State Pension alone is unlikely to give us bountiful financial resources in our golden years. As I write, the full new State Pension is worth just £179.60 per week.
So, at 40, I’d take three steps aimed at changing my financial outlook. The first is to adopt the habit of regular monthly saving. And the second is to prioritise my saving by deducting it from the income flowing into my current account before paying any other living expenses. And I’d choose to do that by setting up automatic transfers from my current account into my savings and investment accounts.
But after building up a pragmatic cash cushion to fund emergencies, my third step would be to invest most of my monthly savings into stocks and shares. And that’s because shares as a class of asset have outperformed all other major asset classes over the long haul. Although there’s no guarantee they’ll continue to outperform.
A diversified approach to stock investing
One approach could be to invest in low-cost index tracker funds, such as those following the fortunes of FTSE 100, FTSE 250, America’s S&P 500, and others. Or perhaps into investment trusts and managed funds. And I do spread my monthly investments between several collective investment vehicles such as those.
But I’m also aiming to increase my annualised returns by investing in individual stocks I’ve researched and chosen carefully. And the reason is small increases in the rate of annualised return can compound to make a big difference to the size of an investment account over time.
However, as well as the potential for gains, all shares carry risks. And it’s not certain that any programme of stock investment will deliver a positive outcome. But I’d aim to mitigate some of the risks by focusing on the quality of underlying businesses first.
For example, I’d look for indicators that demonstrate a business may have a strong trading niche in its markets. So, for me, that means looking at things such as profit margins, consistency of earnings, and rates of return on equity and capital. But I’d also aim to buy stocks when they offer good value for the business, so price is important. And I’d want a business to have decent growth prospects and operational momentum.
