The Motley Fool

Stop saving and start investing! This plan could help you retire early

Living within your means and having cash savings may improve your chances of retiring early. However, your retirement prospects could enjoy a greater boost from investing that capital in the stock market. It offers a significantly higher potential return than cash – especially since interest rates are at a relatively low level at the present time.

Through investing regularly in undervalued shares and holding them for the long run, you could build a surprisingly large retirement portfolio. With investor sentiment having weakened of late, now could be the right time to make a start on your plan to retire early.

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Investing regularly

Investing regularly in the stock market could be a sound means to capitalise on the long-term return potential offered by equities. It may enable you to take advantage of the volatility of the stock market by purchasing shares throughout the various downturns and bear markets which occur relatively frequently. This may lead to high returns in the long run which boost the performance of your retirement portfolio.

In addition, investing regularly can be a cost-effective means of gaining exposure to shares. Many online sharedealing providers offer lower commission rates for regular investments. And, since the minimum investment is relatively low in many cases, it could mean that accessing the stock market’s growth potential is available to a wide range of investors.

Value focus

When deciding which shares to buy regularly, it may be a good idea to consider whether they offer good value for money. As well as considering the price being paid for a specific stock through metrics such as the price-to-earnings (P/E) ratio and dividend yield, assessing its economic moat could be a profitable move.

The size of a company’s economic moat, or competitive advantage, may be impacted by its cost base compared to sector peers, the level of brand loyalty it has among customers, or other factors such as its key markets and geographies. By assessing the quality of a business, and whether its current price overvalues or undervalues its growth potential, you may be able to unearth the most attractive businesses in the stock market. Over time, they may increase your chances of generating high and consistent returns.

Long term focus

The track record of the stock market shows that it experiences challenging periods at regular intervals. However, over the long run it has always recovered from such periods to post new record highs.

Therefore, focusing on the long term, rather than being concerned with the short run, could be a worthwhile strategy to adopt. In doing so, you could be better equipped to ignore market ‘noise’ during periods of uncertainty, and may find that you are able to capitalise on the cyclicality of the stock market to an even greater extent. This may help to bring your retirement date a step closer – especially when compared to holding cash savings.

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