The stock market crash was indiscriminate and knocked down the share prices of almost everything. Some stocks have put in a remarkable recovery already. However, there are still several cheap shares to choose between.
Compounding gains from FTSE 100 shares
Meanwhile, one well-trodden path to getting rich and retiring early is to compound your gains from FTSE 100 shares. In other words, plough your dividend income back into shares. And if you sell a share to realise a profit, invest that money back into shares as well.
The idea, of course, is the money you regularly put back in will earn dividends as well. And if share prices rise, they will inflate your original invested money and the gains you’ve added along the way.
And if you keep ploughing your gains back in over many years, and keep compounding, you could be amazed by the eventual outcome. For example, we’ve become used to hearing that the spread of coronavirus can be exponential. But compounding works exponentially as well.
And the exponential growth curve accelerates upwards the longer the growth carries on. In other words, after a while, growth takes off like a rocket. Clearly, that’s a wonderful thing if it applies to the value of your share account. But it’s not so great if it applies to the spread of a virus.
The principle of compounding is the key to getting rich and retiring early by investing in shares. But I reckon it’s also important to shelter your holdings in a tax-efficient wrapper. I’d choose either Self-Invested Person Pension (SIPP) or a Stocks and Shares ISA. Or you could invest within both types to achieve diversification between accounts for the best of both worlds.
Well-established and liquid
But what should you invest in? I can understand the attraction of going for shares in the FTSE 100. The index features the largest companies listed on the London stock exchange when measured by their market capitalisations. As such, stable, well-established underlying businesses tend to back them.
And one of the great features that comes with size is you can get into and out of the shares easily. Indeed, because so many shares are usually traded every day, liquidity is good. You can buy and sell in the size you need with relatively tight spreads, which helps to keep your trading costs down.
However, it pays to know the type of beast you’re dealing with. Some shares have defensive underlying businesses that can be resilient to the ups and downs of the wider economy such as Diageo (LON:), GlaxoSmithKline and National Grid (LON:). Others are cyclical, such as Next, Persimmon (LON:) and Aviva (LON:). But right now, following the stock market crash, I’d invest In all the names I’ve mentioned.
Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK owns shares of Next. The Motley Fool UK has recommended Diageo. 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.
Motley Fool UK 2020
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