What is a smart way to start building wealth with an eye on retiring early? Some buy gold, hoping its value will rise in economically uncertain times, which it can do. But precious metals never pay dividends and are not productive assets, so they are not for me.
Instead, I like to invest in FTSE 100 shares. Many can pay me dividends. And if I buy unloved shares in great companies, I may also benefit as a long-term investor from prices moving up over time.
How would I go about it?
What’s in a share price?
A lot of people misunderstand what a share price tells them. They think it indicates how good or valuable a company is. It does not. What a share price shows is how good or valuable stock market investors in aggregate think it is.
Those can be very different things. Sometimes a great company can be unloved, meaning the price at which I can buy into it is lower than what I think it is worth. As an example, consider one of the FTSE 100 shares in my portfolio: JD Sports.
Has the potential value of JD Sports moved around over the past year? I think it has. A recession increases risks of shoppers cutting spending, something that could hurt sales and profits. Yesterday’s trading update from the company made it clear that risk has not yet come to pass.
But look at the chart above again. The JD Sports share price has moved up 69% in three months. Has the company valuation really changed that much in such a short period of time? I do not think so. It is just that back in October, JD Sports shares were unloved by investors.
Putting this into action
So how could this insight help me retire early? I hope to build a retirement portfolio diversified across a number of FTSE 100 shares. If I generate enough dividends and capital appreciation, that could help me fund an earlier retirement.
Simply buying stocks with low prices might not enable me to do that. Low share prices can always get lower. A share might seem cheap but turn out to be a value trap. In such a case, the low price could suggest that investors think the business will do worse in future than it does at the moment, justifying a lower valuation.
Instead, I would hunt for unloved FTSE 100 shares – like JD Sports was several months ago. If the business has a competitive advantage in a sector I expect to see long-term customer demand, it may be valuable even though its share price has been hurt by short-term investor concerns. That gives me a buying opportunity.
Hunting for unloved FTSE 100 shares
That is how I have been building my portfolio. For example, I have been increasing my stake in Dunelm. The company has seen its share price fall as investors take fright at what a weaker housing market could mean for homewares demand. But I see Dunelm as a strong business with a bright future, even if the next couple of years could see sales wobble.
Hunting for unloved shares I can add to my portfolio, like Dunelm, can helpfully set me on the road to greater financial independence as I approach retirement.
