If you’re near 50 and without savings, it’s not too late to invest your way to a pot worth a million and retire rich.
But with just under two decades until you reach the State Pension age, which is a good time to retire, you’ll have to work hard at it. I reckon these tips can help you retire rich with shares.
Tips to help you retire rich with shares
Firstly, I’d start putting money away every month. And as much as you can afford. You may wish to consider trimming some of your lifestyle expenses to boost the amount you can save.
Key to building up a meaningful investment pot of money is the process of compounding. And that’s what you need to achieve with your monthly savings. Most of us realise that if we save money in a cash savings account and leave it there, the money will grow over time because of the interest added each year. And the longer we live it, the bigger it grows.
Every year, interest is added both to the initial sum we added to the account and to the interest from the previous years. And it’s the interest added to the interest that can really make things grow. Happily, compounding works exponentially, which means the gains accelerate over time. Indeed, after a long period of compounding, you could be amazed by how large the yearly gains become.
But little changes in the annual rate of the return we achieve add up to big differences in the final size of the investment pot. And because cash accounts pay such low interest rates, they fall well short of the annual returns you’ll need. Instead, I’d aim to compound the returns from shares and share-backed investments.
The returns will arrive both as income from shareholder dividends and as capital gains because of rising share prices. To compound those gains, you’ll need to plough all of them back into more shares. So reinvest all the dividends. And if you sell an investment, reinvest the proceeds into more shares.
Aiming for high returns
One way of approaching the markets is to invest in managed share funds, or in index tracker funds, such as those following the FTSE 100, FTSE 250 or America’s S&P 500. Over the medium and longer terms, such tracker funds tend to deliver annual returns in mid- to high-single-digit percentages. That’s a good start, and certainly better than you can expect from cash savings.
But many investors aim for higher annualised returns by investing in the shares of individual companies. I’d spread my risk by investing across several firms. And I’d do plenty of research and due diligence to make sure the underlying businesses are sound. With your 20-year investment horizon, you can’t afford many expensive mistakes.
I reckon when it comes to successful investing, it pays to focus on the quality of the underlying enterprise and its opportunities for advancement. I’d look for companies operating in a strong trading niche and examine factors such as profit margins, consistency of earnings, and rates of return on equity and capital.
After that, and having identified a decent opportunity, I’d aim to buy the shares at opportune moments when the price makes sense of an investment. Good luck on your investing journey!
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Kevin Godbold has no position in any share 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.