Two ways to make investing easy – MoneyWeek

Two ways to make investing easy – MoneyWeek

Itdoesn’tneedtobelikethis。

Herearetwosimple,commonsensestrategiesthatwillhelpyoukeepyourheadwhileotherslosetheirs。

Usethepowerofcompoundinterest

Ifyouallowitthetimetodoitswork,thepowerofcompoundinterest?

(earninginterestoninterest),cangrowyourmoneyprettypainlessly。

If,likeme,you’reaconservativeinvestor,thenyouaimtoputyourmoneyinassetswherealargechunkofyourreturnsisindependentofthemarket’smoodswings。

Youfocusonincomeratherthancapitalgaininotherwords,youarelookingforlargedividendpaymentsonshares,chunkyrentsonpropertyorbigcouponsonbonds。

Bybuyingassetslikethisandreinvestingtheincomeyouharvestfromthem,youcanbuildupyoursavingspotsubstantially–aslongasyou’repatient。

Onceyou’vefoundtherightasset,sitbackandletthepowerofcompoundinterestworkforyou。

Takeutilitycompany?

NationalGrid(LSE:NG/)。

At678pitpaysanannualdividendof39ppershare,givingitayieldof5。

7%。

Let’sassumeforthesakeofargumentthatNationalGridpays39ppershareforever,andthesharepricegoesnowhereforthenext20years。

IfIbuy1,000sharesandreinvestmydividendseveryyear,myinitialinvestmentof£6,785treblesto£20,749attheendof20years。

Myannualdividendincomeis£1,128,givingmeayieldonmyinitialcostof16。

6%。

That’snottooshabby。

Ofcourse,thisdoesn’tmeanthatyoujustgooutandbuythehighest-yieldingassetsonthemarket。

Acrucialpartofthisapproachistheabilityoftheassettokeeppayingadecentyield。

It’snogoodoptingforastockthat’sapparentlyyielding10%ifitthenhastoscraporcutitsdividend。

MycolleagueTimBennettlookedatthreewaysto‘stresstest’dividendsearlierthisyear。

Anotheroptionistoinvestinpreferenceshares,whicharesomewherebetweenashareandabond。

Obviously,preferencesharesarenotrisk-freebyanymeans–thecapitalvaluegoesupanddownjustlikeanyotherinvestment,andthere’salwaysbankruptcyrisk。

Thesharescanbelessliquidthanstandardequities,too。

I’vewritteninmoredetailabouttherisksaroundpreferenceshareshere:Seekingincome?

Trythesefourpreferenceshares。

Whatsinterestingforincomeinvestorsishowdividendsonpreferencesharesarepaid。

Thedividendonapreferenceshareisusuallyfixed–soitwon’triseovertime,asyou’dhopeforwithanequity。

However,preferenceshareholdersarefirstinlinefordividendpayments。

Acompanycan’tpayouttoordinaryshareholdersunlessthepreferencedividendhasbeenpaidfirst。

OneoptionI’vesuggestedbeforeistheRoyalSunAlliance73/8%(LSE:RSAB)preferenceshare。

Forgetabouttimingthemarket

Theotherwaytostopyourselffrombeingdistractedbypanickymarketsisto‘pound-costaverage’。

Thisisaslightlyclunkydescriptionforsomethingverysimple,butitjustmeansinvestingmoneyatregularperiodssuchasonceamonth,ratherthanalumpsumallatonce。

Thiscanbeaparticularlygoodstrategywhenmarketsmoveupanddownalotastheyaredoingatthemoment。

There’snoevidencetosuggestthatpound-costaveragingworksbetterthanlumpsuminvestingintermsofperformance。

Lastyear,theAssociationofInvestmentCompaniescomparedtheresultsfrommakingregularsavingswiththoseofinvestinglumpsumsatvariouspoints。

Theoutcomewasmixed:theyfoundthatinbearmarkets,regularsaversdidbetter,butoverlongerperiods,lumpsumswonprovidedyougotinatasensibleentrylevel。

Butthat’sthecatch。

Thefactisthatveryfewofusaresmartenoughtocallmarkettopsandbottoms;theadvantageofadrip-feedingstrategyisthatyoudon’tneedtoworryaboutthisasmuch。

Italsoitforcesyoutostayinvestedsothatyoutakeadvantageofcheapprices。

Mostbrokerscansetupregularinvestmentandautomaticdividendreinvestmentplansforyou。

Thenyoucanshutdownyourcomputerandresistthetemptationtobeswayedintotradingbythemarket’sshort-termmoodswings。



ThisarticleistakenfromthefreeinvestmentemailMoneyMorning。

SignuptoMoneyMorninghere。

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