Here’s a Footsie ISA investment strategy that could lead you to a happy retirement
The State Pension of around £8,500 per year isn’t much good, though many people have company pensions to add to it.
Most of us should be putting something extra away for our retirements, too. But whenever I tell people that I reckon a stocks & shares ISA is by far the best place to invest, they’re often too afraid of the possibility of even short-term losses.
But if you still have decades to go until retirement, you shouldn’t be afraid of the ups and downs of share prices. In fact, you should welcome them.
My preferred retirement investing strategy is very simple. Put your cash in a stocks & shares ISA and buy dividend-paying FTSE 100 stocks. Then reinvest the dividends into more of the same kind of stocks. That’s it.
How does volatility help? If you are buying things rather than selling them, you’ll get more for the same money when they’re cheaper, of course. That’s obvious to people snapping up twofers at the supermarket, but as soon as they buy shares, they’re only happy if they go up… even though they will want to buy more next month, or next year, or whenever.
Some people advocate buying in the dips, but timing the market is notoriously difficult. I say just make each investment as soon as you’ve built up enough for a purchase, and the movements of the market will do the rest for you.
How it works
Over the long term, the market will almost certainly rise. If it goes up in a simple straight line, every time you make a new investment you’ll get slightly fewer shares for the same money.
But as it will actually zig-zag to some extent, you’ll get more shares when the market is below its straight line path, and fewer when it’s above.
And that means your average buying price will be lower than if the market had followed a straight line.
For example, suppose you make four investments of £1,000 over time, at 100p, 105p, 110p, and 115p per share in a steadily rising market. You’ll buy a total of 3,731 shares.
But if the prices go through 100p, 90p (15p lower that above), 125p (15p higher) and 115p, you’ll actually end up with 3,780 shares — 49 more shares — even though the price ended up the same in both cases, and the volatility was equally split up and down. The volatility itself got you more.
Can you do even better?
It’s an effect known as “pound cost averaging”, and some people go as far as to try improving it by deliberately holding back investment cash and spreading out their purchases over time.
But there’s a good reason not to do that — shares go up more often than they go down.
So delaying is more likely to result in you facing more rather than less expensive shares than today. The benefit of averaging caused by volatility is there, but it’s outweighed by the benefit of getting your cash into the market earlier.
Hopefully, you can now see that volatility is your friend. But what actual shares should you buy?
Views expressed 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.