How to live off your investments

MoneyIf you'd like to be able to invest for a living, read on...
How many of those emails do you get each week telling you how you can earn £6,000 month working from home, from a tiny investment capital following "our straightforward trading strategy" etc.?
It's a wonder we aren't all living on easy street really.
Of course, such emails should be sent straight out into cyber heaven.

At least the property ones seem to have dropped off along with property prices. But the comparison between earning one's corn from the stock market or from property investments is a good one.

Until the middle part of 2007, all we had to do to make money from property, it seemed, was to buy one, then watch it rise. The rental yields were a secondary consideration; something for the small-minded pedants among us. Property was an "investment", regardless of its ability to generate income -- it was all about the rapid capital increase.

So it seems it is with shares. Buying shares in solid companies with good track records, strong balance sheets, growing steadily and paying a reasonable dividend from good cash flow is boring. Such companies aren't going to strike big oil, find gold in far-flung lands, and don't have world-beating technology set to revolutionise the way we do things.

Get rich quickly or slowly?
Of course, in both cases, it's better to have one's feet on the ground and to assess real underlying value and the likely income stream, before other considerations. You don't need to ignore the exciting ones; just give them an appropriate allocation.

Perhaps this has too much of the "hair-shirt" mentality about it? But if you're looking to "get rich quick" in the markets, you'd better be extremely lucky, have a genuine gift for trading, be a numerical genius, or have a real market "insight" -- choosing my words carefully on the latter point.

For the rest of us, it's important to bear in mind two fundamental points:
Most traders lose money.
Most shares are losers.

Remember these two truisms; graffiti them onto your PC if necessary.
It's said that nine out of ten traders lose money and Foolish writer Jeff Fischer demonstrated that three-quarters of all shares lose money.
So the odds seem firmly stacked against you. But remember, too, that of the main asset classes (cash, bonds, commodities, property and shares), shares have historically produced the best returns.
Over the past nine decades, the UK market has returned around 11% a year, with dividends reinvested. Historically, post-inflation returns from shares are usually said to be in the range of 5.5% to 8% a year in the long term. Of this, around 4% to 5% comes from dividends and their re-investment.
Beat the market
It's not easy to beat the market. But many of us do so consistently. From personal experience, I've found it's better to hold larger amounts in fewer companies' shares, which are thoroughly researched. A portfolio spread over too many different shares is unlikely to beat the overall market direction. But maybe you don't need to? It all depends on the investment pot you've managed to build up.
It's also important to be patient and to concentrate more on value (and dividend income to keep you going) than price. As Warren Buffett says "Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market".
The aim is to get to a position where your basic income is covered by dividends (from shares and/or bonds) interest / rent from property etc. Any capital rise is then a bonus.
For most of us, this means spending less than we earn for years as we gradually build an investing pot of sufficient size, whilst simultaneously trying out different strategies and learning from our mistakes as we go.

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