In my lifetime so far, I’ve been surprised by how big a pot of money can grow by investing as little as £300 per month in shares.
Of course, all the usual warnings and caveats apply. Shares can go down as well as up and neither long-term capital growth nor shareholder dividends are guaranteed. All shares contain an element of risk.
Compounding passive income
But it’s by embracing these risks that I’ve gained the opportunity for higher compounded returns than I could have achieved by saving money in a cash account.
When I was barely out of my teenage years, my regular monthly investments went straight into fully managed pension plans. And those equity fund managers kept the value of my fund growing by buying and selling shares at opportune moments. I was a fascinated and keen observer and eagerly devoured my annual statements.
Often those pension statements used to show big annual rises in my pension pot far in excess of the money I’d paid in during the year. However, sometimes the fund remained flat or even went lower and I’d feel a little bit of mild panic! Yet, most often my pension pot would make up the losses and then some the following year. And overall, annual gains built upon annual gains to compound my money.
Going it alone
Years later I transferred my managed pensions into a Self-Invested Personal Pension (SIPP) account so I could run my investments myself. And by then the pot of money I’d accumulated was several times larger than the sum of all my prior monthly contributions.
Since managing my own money I’ve embraced the principle of wide diversification to help keep my money compounding. And these days there are many opportunities to buy slices of managed funds, investment trusts, and passive tracker funds.
My own approach has been to spread my monthly contributions between several such collective investments to achieve even wider diversification. And the great news is, many funds accept monthly contributions as low as £25. So there’s plenty of scope for diversification.
I like investment managers such as Terry Smith and Nick Train, so invest in some of their funds. And I’ve got investments in low-cost passive index tracker funds too. For example, one fund tracks the FTSE 100 index, another the FTSE 250 index. And I’m tracking America’s S&P 500 as well as UK and US small-cap stocks.
Aiming for higher returns
Those collective funds form a foundation for my investment strategy. But I also invest in the shares of individual companies in the pursuit of higher gains. Many investors move on to individual investments when they’ve gained some experience with investing. However, the work is greater and harder because it’s important to do thorough research before buying and while holding such investments.
In the investment pot building stage, I’m being sure to reinvest all my gains and dividends along the way to help keep my funds compounding in value. But when the time comes to draw on my investments I aim to switch over to collecting my dividends as passive income. Nothing is certain and unforeseen circumstances could lead to my investments losing money. But things are working out quite well so far!
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Kevin Godbold has no position in any share 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.
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