The Guide to Investing in Stocks and Shares

Investment goals

Dan Tebbutt - A Shareworld Contributor

What are your investment goals?  Are you saving for retirement, hoping to become the next Warren Buffett, or just looking for a better return than a savings account?  Do you tailor your investments according to your aims?  Setting clear goals, sticking to them, and then investing accordingly could make you a better investor.

From October 2007 to March 2009 the FTSE 100 fell almost 50%.  In the same period RBS shares fell 97%.  Horror stories abounded about pensioners with all of their savings locked up in RBS or HBoS shares.  Perhaps if they had thought more carefully about their investment goals, they might not have suffered quite so badly.  If a pensioner is relying on the income from their nest-egg to supplement their pension, then being fully invested in the stockmarket is risky enough, let alone putting everything on a single share.

Personally, I am looking to the stockmarket to allow me to retire earlier than I otherwise would.  I'm 29 now, and working until 65 seems a daunting prospect.  Retiring at 50 would be very nice indeed.  Furthermore, I'd like to have enough money that I can live off interest and dividends, without touching the capital or buying an annuity.

With a 20+ year investing horizon, I'm happy to invest in risky assets if they provide a superior return.  At the moment I think shares qualify for that description, and they form the bulk of my investments.

With a reasonable set of assumptions I should be able to work out what I need to do in order to meet my goal of retiring at 50.  Assuming I can get a yield of 3% on shares, 6% on bonds, that inflation is 3% and that the capital value of the shares increases by 6% a year, then the real return on bonds is 3% and the real return on shares is 6%.  If my retirement pot is split 50/50 then I will earn a 4.5% real return which I can spend without affecting the capital value of my pot.  Conveniently that is exactly equal to the dividends and interest I will receive.

Let's call the income I'm looking for in retirement 'R'.  My retirement pot needs to be 22R (100 divided by 4.5).  I'm currently a long way off that - but a 6% real return over 20 years (since I expect to be mainly invested in shares for the bulk of this time) will more than treble my current pot.  A quick play with a spreadsheet tells me that I will need to save R/3 every year for the next 20 years.  That is tough but doable - and it's good to know that if I manage to do so, and if my assumptions hold true, my goal of retiring at 50 could be within reach.