Retiring early is many people’s ambition. Even if you’re not interested in giving up your job just yet, having enough money to fall back on can feel liberating. With the FTSE 100 falling by 17% in the year-to-date, now could be a great time to start making steps to achieve your dream of retiring early.
Second market crash
Many people might be frightened that a second market crash is on its way. There’s still a lot of uncertainty and I think it’s reasonable to assume that another severe drop in the market could be likely.
But I’m not scared. Instead, I believe this could be an opportunity for those aiming to retire early.
Some fear a market crash because they believe it means they would lose a large chunk of their retirement nest egg. I see it another way.
Although a second market crash means falling share prices, money hasn’t been lost until I’ve sold my shares. As a long-term investor, I have confidence that over time, stock prices tend to go up. For me then, the sensible course of action is usually to do nothing and to hold my position.
Nervous investors do have a way to potentially ride out some of the market wobbles. This is by pound-cost-averaging, a simple process that requires the investor to set up a regular payment — say monthly — to buy shares. By doing this, you’re investing at the high and low points of a market cycle, which means in the longer term, the amount paid for the shares should average out. Those investing for early retirement will usually also benefit from a longer investing timeframe.
I’d invest £250 a month in a Stocks and Shares ISA
By using £250 a month to invest in a Stocks and Shares ISA, you’ll be buying at regular intervals. Therefore, this could provide an element of safety.
However, fees can soon rack up. Transaction fees can sometimes amount to upwards of £10 each time you purchase stocks in an individual company. When buying shares with £250 every month, with a £10 transaction fee, you have already lost 4% of your initial investment.
And that’s only if you buy shares in one company. With this monthly sum, it can be difficult to build up a diversified portfolio without paying out much of your money in fees.
Index investing and retiring early
The good news is that there’s a way you can build a diversified portfolio without losing a large chunk of your money to fees.
This is by index investing, where you invest in a fund that aims to track a market index like the FTSE 100 or the FTSE 250. Usually, fees for this type of investment are based on a percentage of your holding, rather than a transactional fee.
Although I think private individuals can beat the returns of the FTSE 100, newer investors might feel more comfortable with the immediate diversity an index fund can offer.
The other benefit of index investing is its simplicity. You can set up your regular payment and then periodically assess how your investment is doing. This might help mitigate any emotional reaction to news events.
With a monthly sum like £250 going into my ISA, I’d seriously consider buying into an index fund with the hope of benefiting from the economy’s likely long-term recovery.
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T Sligo has no position in any of the shares 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.