For many investors, a profitable portfolio is not an attempt to get rich quick, but is simply a way to save for retirement.
While anyone would welcome a hefty profit, many are just looking to build a pension pot that will yield an annual return in retirement to fund a comfortable lifestyle.
There are a few common vehicles for this, from pension funds with annuities to investing in rental property to ensure an annual return from tenants’ rents.
But one avenue that is also worth a look is the FTSE 100, as careful investment in London’s top trading stocks over the long term could achieve enough for a comfortable retirement.
Here are just three ways the FTSE 100 ticks the boxes when looking to invest in a way that will pay you a satisfactory pension…
The FTSE 100 is one of the most widely traded stock indices in the world, and that means it is designed for good access by investors at all levels.
If you are an intermediate investor, you’re still going to be able to trade the FTSE 100 with relatively low transaction fees.
Fund providers offer FTSE 100 trackers that charge management fees of just a fraction of a percent, which means you get to keep as much as possible of the return your investment makes over the course of each year.
Those fractional gains can be significant when they are compounded over many years – potentially several decades before you choose to access the funds you have invested for retirement.
Invest £10,000 for ten years, and a difference in management fees of around one percentage point can compound into a difference of around 10% in the value of your investment.
The FTSE 100 is inherently a fairly diversified market, as at any given time it contains 100 of the most valuable stocks from a range of different sectors, and operating in countries all over the world.
London is of course the basis for the index itself, but that does not mean that every company on the list is subject solely to the whims of the UK economy.
Again, a well managed FTSE 100 tracker will tap into this diverse potential, capitalising on positive growth in other parts of the world, and across the full range from traditional to emerging industries.
Sectors spanned by the FTSE 100 range from utilities and telecommunications, to retail and software development – and all among the top performers in their markets in terms of share price, making it a useful one-stop shopping basket for investors at all levels.
Dividends are the annuities of the stock market world, and a substantial FTSE 100 portfolio could yield a significant amount in yearly dividend payouts.
The FTSE 100 typically yields around 4-5%, making it one of the best indices in the world in terms of dividends, although of course this depends on factors like the financial performance of the companies that are included in the top 100.
Again the diversification helps – pockets of poorer performance are likely to be balanced by better results elsewhere in the index.
Remember too that the FTSE 100 is periodically rebalanced, with the poorest performers relegated from this ‘premier league’ index and replaced by rising stars that were previously not on the list.
Because dividends are by definition positive, and at least some companies in the FTSE 100 are likely to pay a dividend in any given year, the index is very likely to post a positive yield in this sense in any 12-month period.
Patience makes profits for pensions
Finally, remember that investing for retirement is a long-term plan, and you should be prepared to watch your portfolio grow gradually, especially in the lean times when the FTSE 100’s performance might be relatively low.
A well-managed tracker fund should find the potential even in a subdued FTSE 100, so that you don’t face the challenge of making individual trades in stocks that you think will go up or down in the short to medium term.
If you’re approaching retirement and your portfolio looks strong, you might also want to consider withdrawing some of its value, rather than keeping all of your money in the stock market.
Taking some of that equity out of stocks puts it at your disposal for when you retire, and crucially means that it is protected against a sudden economic shock or stock market crash at a time when you would have just a few years to rebuild that value before retiring.
Disclaimer: The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.