This investing mistake could crush your dreams of retiring early!

Fancy retiring early? If so, you’d better make sure you get this right.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

As much as we’d like to think otherwise, the only thing we have control over as investors is our attitude to risk.

In a way, this fact should be liberating. By recognising that markets and individual stocks have absolutely no interest in our financial security, we should be able to neatly avoid wasting a lot of our limited time and energy glued to our smartphones and tablets willing Company XYZ to get its act together and start giving us the returns we asked for.

The only potential downside to all this, however, is that misjudging our risk tolerance can prevent us from reaching our goals. Taken to the extreme, it can mean the difference between a person retiring early and spending several more years — decades, even — slogging away at a job they despise.

So, how do we know what is an acceptable amount of risk to take if we harbour the desire to quit the rat race long before most can even consider it?

Know thyself

Perhaps the most important point to recognise about risk tolerance is that only the person investing their hard-earned money can know what feels right. A financial adviser may be able to offer some guidance but even this will be based on information already provided by his or her client. 

As a general rule, however, those wanting to retire early are clearly going to need to be comfortable with the thought of taking on more risk. A portfolio chock full of ‘safe’ assets may be less likely to keep you awake at night but it’s also very unlikely to get you to where you want to be in double-quick time. The ability to retire early is usually the result of achieving exceptional returns in one form or another.

A pre-requisite for exceptional returns is a willingness to do what most people won’t. This could involve investing in companies lower down the market spectrum or buying stocks in (temporarily) depressed sectors — something top fund manager Neil Woodford did with great success during the late 1990s.

The amount of time a person can stay invested is also a consideration. While retiring early might be the goal, having the luxury of a reasonably long investing horizon is nevertheless beneficial since it allows a person the comfort of knowing that they have plenty of time to make up for any mistakes they make (which as a fallible human being, they will). 

Buying shares just before markets correct or crash isn’t such a big deal either, assuming s/he doesn’t need access to his or her capital for a while. So long as there is an emergency cash fund to cover living expenses, these events — which we can’t predict with any certainty — can be pretty much ignored.

Related to the above, a final point to appreciate is that risk appetite changes across the lifespan. The suggestion that older investors and/or those already well on their way to achieving their financial goals (such as retiring early) should consider reducing their exposure to equities with the intention of protecting the gains they’ve already made is clearly prudent. Staying fully invested and ignoring less volatile assets such as gilts and bonds is a decidedly more risky strategy since a market fall could occur at the very time access to the money is required. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers 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.

More on Investing Articles

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »