I am planning to retire early, and I hope to do this by investing in the stock market. Indeed, I believe that investing is one of the best ways to build wealth in the long term.
However, there is no guarantee I will be able to leave the workforce early just by acquiring investment assets. The world of investing can be challenging and unpredictable to navigate. Many investors have lost everything by making the wrong decisions.
That is why I am planning to stick to three investing habits to grow and develop my wealth. I believe that by sticking to these rules, I can increase my chances of being able to retire early with a large financial nest egg.
Planning to retire early
The first part of my plan is to map out how I am going to reach my target. According to my projections, I will need a figure of around £800,000 to be able to retire early. I estimate this sum will allow me to quit work and live on a small annual income, enough to cover food and housing costs.
Unfortunately, this figure is not set in stone. It is impossible for me to estimate how much annual income I will require today when I do not plan to retire for a couple of decades. There is plenty that could change in the meantime. Life is unpredictable, and I may have to change my projections if the world throws me a curveball.
Still, I think a figure of £800k is an excellent target to start with. I believe this is more than enough to provide a solid base for me to plan an early retirement.
Investing habits
To hit this target, I am going to adhere to a set of strict investing habits, which should help me build wealth faster, and stick to my long term goals.
I think the most important investing habit is to set up a regular savings goal. I know I am targeting a lump sum and off the back of this target, I can calculate how much I will need to save every week/every month in order to hit the goal.
According to my calculations, assuming my investments return around 10% per annum, I believe I will have to save £400 a month for 30 years to hit my £800k target.
Of course, this is just a back-of-the-envelope-style calculation. There is no guarantee I will be able to earn 10% per annum over the next three decades from equities. The actual return could be a lot less… or a lot more. Nevertheless, this is not supposed to be an accurate figure. It is to provide a benchmark for me to aim for over the next few years.
Any number of factors could cause me to miss this target. If the market only returns 1% per annum for the next three decades, I will not be able to build a £800k portfolio unless I save a lot more.
With this target in place, I know I will have to put away at least £400 a month, or roughly £93 a week, to hit my goal of being able to retire early.
Investing for growth
So the first inventing habit I will be sticking to over the next few decades is regularly saving and investing. The next habit is to stick to an investment strategy.
Research shows that one of the main reasons investors do not meet their goals is that they trade too much. Jumping in and out of investments can incur costs, which add up over the long run. Not only do I have to consider investment costs, but I also need to consider taxes as well. All of these charges can nibble at my investment returns and delay my wealth building.
As such, I am planning to choose a few investments and stick with them. The investments I am planning to buy are index funds and a selection of high-quality enterprises with substantial competitive advantages. Companies such as Diageo and Reckitt, which I already own in my portfolio.
Despite using this approach, I am well aware that there is no guarantee I will be able to avoid trading. The market is unpredictable, as is life. If a company’s fortunes change, or if my fortunes change, I might have to sell investments. This is something I will have to live with.
Saving and investing on a regular basis and sticking with investments are the first two habits I believe will help improve my chances of being able to retire early.
Focus on the long term to retire early
The next habit I plan to lean heavily on to build wealth is closely linked with the principle outlined above. As well as sticking with investments, I will also be viewing each holding through a long-term lens.
Whenever I buy an investment, I want to make sure it is something I will be comfortable holding for five, 10, or even 20 years. The goal of this approach is twofold. I think it will help me focus on finding great companies and reduce trading.
As noted above, overtrading can incur high costs. So this is something I want to avoid. I also want to avoid losing money, and the best way to do this is only to buy high-quality businesses that have a long runway for growth.
I think if I approach each investment idea with the view that if I buy, I will need to hold for at least a decade, I will avoid any high-risk companies. This is not a guarantee. A corporation that looks to be a great business today could run into trouble at any point.
Still, I think this approach will help me think twice before investing and improve my odds of being able to retire early.
Overall, there is no guarantee that I will be able to retire early using the stock market. However, I believe that by incorporating the three investing habits outlined above, I can increase my chances of success.
