For most people, the main aim of investing is to attain a relatively high standard of living in retirement. While it is a very realistic goal to have, not all investors are able to achieve it.
A key reason for this is that they begin their quest for a wealthy retirement when it is too late for compounding to have a hugely positive impact on their portfolio. For example, starting at the age of 20 rather than the age of 40 means that compounding has an additional two decades through which to boost returns which, in the long run, can make a vast difference.
In fact, if a portfolio was to post a return of 7% per annum over a long period, the difference between starting to invest for retirement at 20 rather than 40 could be a lot larger than many investors realise. For example, if £10k was invested each year within that period, it would be worth £410k by the age of 40 and, incredibly, would then go on to be worth a total of £2.2m by the age of 65 even if no more capital was added after the first 20 years.
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In addition, many investors fail to achieve their goal of a financially secure retirement by the age of 65 because they become fearful during challenging periods for the market. For example, the recent pullback to 5,800 points by the FTSE 100 may prove to have been a sound long term buying opportunity, but many investors may have held back for fear that further falls were on the cards.
This, though, goes against the idea of ‘buying low and selling high’, since it means that the best prices are missed. For long term investors, the performance of the FTSE 100 over a period of even a few years matters little if the time horizon is measured in decades. As such, buying through market weakness is a sound move which can lock-in greater profit in the long run.
Furthermore, a lack of diversity tends to hold the performance of portfolios back in the long run, too. For example, many investors seem to buy only a handful of shares, many of which are in the same sector or operate within the same industry. However, the reality is that over a long period consumer tastes change, companies go bust and the global economy evolves. As a result, it makes sense to diversify not only between companies operating in different sectors but also in different parts of the world.
So, while obtaining a wealthy retirement may not be straightforward, it is very much achievable for any investor. And, by starting your journey early, buying during downturns and owning a wide range of stocks, the chances of achieving your goal are likely to be significantly improved.
