A good rule of thumb when saving for retirement is to always put aside at least a little bit of money every month, no matter how small. Doing so doesn’t just build a healthy habit, it can also get you closer to your goals than you might think. £500 might not seem like a lot of money but, when correctly invested over a long period of time, it can compound to a surprisingly large amount. Before you do that however, here’s what I think you should not do.
The wild swings in the price of Bitcoin make it an attractive asset for speculators who dream of becoming overnight millionaires. Unfortunately, the price of Bitcoin is not tethered in any meaningful way to an underlying fundamental as stocks are. All tradable assets are to a certain extent affected by psychology and market sentiment. However, with a publicly-traded company, it is possible to calculate what the price of its stock should be, by estimating the present value of future cash flows and other metrics that it publishes regularly.
Bitcoin does not produce any cash flows, making it impossible to determine what the ‘fair’ price for the cryptocurrency should be. For this reason, I believe that Bitcoin investing is essentially just gambling, which is a far cry from the risk-averse approach that investors should adopt.
Ok, so maybe Bitcoin isn’t the way to go. But what about stocks like Sirius Minerals (LSE: SXX)? Shares of the mining company have fallen almost 90% from their 2019 highs, so you may think that they represent a relatively safe buying opportunity. This kind of thinking has undermined many a novice investor — just because something has plummeted in price, doesn’t mean that it can’t go lower.
Investors in Sirius who bought shares at 37p (the August high) may have lost almost 90% of their investment, but if you buy it at 3.5p a share (today’s price) you will lose 100% of your capital if it goes to zero. And there are many reasons to believe that this might happen. It does not make money, is not expected to be profitable any time soon, and is entirely reliant on outside funding for its continued existence.
The stable path is best
The simple truth is, successful investors don’t expect to become millionaires overnight. Anything that can be earned quickly can be taken away just as fast. That kind of uncertainty is something that good investors should avoid at all costs. By looking to buy well-researched, reliable stocks with low (but not rock bottom) price-to-earnings ratios and good dividend yields (5%-7%), you can build up a retirement portfolio that, over a long time, will compound handsomely. That £500, invested at 5% for 40 years will grow to £3,519. And if you were to add an additional £500 every year, you would have £66,940 at the end of those 40 years! Now think about how much more that would be if you invest a few thousand more a year. A lot of little steps can add up to go a very long way.
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Stepan Lavrouk owns no stocks mentioned. 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.