“Before embarking on these kinds of investment be sure to weigh the potential risks and benefits”
How to build income and wealth for retirement 3a: Getting the best from different investment classes through shares
A diversified and well constructed portfolio is critical to income flow at retirement. And, having a good understanding of each principal investment class is important to achieving this.
Shares are one way of achieving additional income and almost all investors hold a portfolio of stocks. Either directly, through a pension or an ISA. Most investors can benefit from the tax efficiency of investing within a pension which creates a great financial building block for retirement.
The ISA investment structure also has tax benefits and will be another popular option, while investing for cash has a significant role to play as well.
The idea of investing in the stock market can be daunting for some, but it can be another way to make money if you know how to do it. However, before embarking on these kinds of investment be sure to weigh the potential risks and benefits and get the right kind of regulated financial advice.
Some considerations when investing in shares with a view to developing pensionable income are shares:
Provide flexibility: shares are an ownership vehicle which enables you to participate in the long term success of a company. Assuming the shares are quoted, they can be bought and sold easily, which makes them a flexible investment.
Can be unreliable: to generate income from shares, you need to receive dividends. High growth companies almost always need to retain profits to fund their expansion and hence rarely pay dividends. Older, established companies with slow growth may pay dividends, but that is entirely at their discretion. A poor year of trading can see dividends cut entirely – not ideal if you are relying on the dividend for income in retirement.
Can be low yielding: The average dividend yield for the FTSE 100 share index is around 4.5% per annum, which is pretty low. Recently, some prominent companies have announced a dividend cut! These include Whitbread, SSE, Vodafone, Centrica, Anglo American and Tui.
Requires management: If you can’t rely on dividends, employing a strategy of selling off shares as they grow in value and either investing the capital elsewhere for income or living off the money relies on capital growth to occur across a reasonable regular timeframe.
If we examine the performance of the FTSE 100 share index over the last 20 years.
There is simply a negligible increase, taking into account the recent fluctuations of these unprecedented times, the variability of the index does not show growth potential unless you are actively involved in the markets.
Investment decisions can be complicated. At Avantis, we are here to help you understand the investments that are presented to you. By understanding more about your investment goals, we can give access to opportunities that can achieve these goals.
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