Can You Imagine What It Feels Like to Know That You Won’t Run Out of Money in Retirement?

Now imagine that the income from your investments, in the form of dividends, grows historically at twice the rate of inflation. Sounds like a dream, doesn’t it? But for those who own shares in great businesses, this can become a reality.

For many investors, the idea of running out of money in retirement is a major source of stress. But what if, instead of lending money to businesses in the form of bonds or other debt instruments, you focused on owning them? When you own a part of a company, you share in its profits, and these profits often grow significantly over time. Over the long term, history has shown that for multi-decade investors, the short-term fluctuations and gyrations of the stock market become irrelevant when they own portfolios of enduringly great companies.

Owning Businesses, Not Lending to Them

Think of it this way: when you lend money to a business, you're essentially providing a loan that the company must pay back with interest. While bonds tend to be less volatile, they have historically delivered lower returns compared to the stock market, often lagging behind in terms of both growth and inflation protection. But when you own a share of the business, you have the potential to benefit from both capital growth and the income generated by dividends. This income can increase over time, often outpacing inflation, providing you with a powerful income stream throughout your retirement.

Of course, it's not about owning just any businesses. The key is to own great, well-established companies with strong track records of profitability and growth. These are businesses that can weather economic storms, adapt to changes, and continue to reward their shareholders. But how can an individual investor hope to identify and invest in all of these companies?

The Power of Globally Diversified Index Trackers

The answer lies in low-cost, globally diversified index trackers. These investment vehicles give you exposure to thousands of businesses across multiple sectors and regions, spreading your risk and ensuring you're not reliant on the success of any one company or country. The simplicity of index trackers means you're not constantly chasing after the next hot stock, but instead, patiently participating in the long-term growth of global businesses.

As John Bogle, the founder of Vanguard and a pioneer of index investing, famously said, "Don’t look for the needle in the haystack. Just buy the haystack!" This quote perfectly encapsulates the power of index investing. Instead of trying to pick individual stocks—those elusive needles that may or may not outperform—you buy the entire market. By owning the haystack, you take part in the collective success of thousands of businesses, ensuring you don’t miss out on the growth of the broader economy. It’s a strategy built on long-term thinking and the belief that markets, over time, tend to rise.

Low-cost index trackers have another major advantage: they keep more of your money working for you. High fees can erode returns over time, but by opting for low-cost investments, you ensure that your money remains invested and continues to grow.

Investor Behaviour: The Most Important Factor

While diversification and low costs are important, they won’t benefit you unless you exhibit patience, a good temperament, and an understanding of your own behaviour. The stock market will always experience volatility. There will be periods of dramatic drops and sudden rallies, and it’s during these times that investor behaviour becomes the most critical factor in achieving long-term success.

It’s easy to get caught up in fear when the market dips, or greed when it’s rising. But history has shown that those who remain patient, ignore short-term noise, and stick to their long-term strategy tend to come out on top.

Understanding that dividend income grows at a rate faster than inflation helps to ease the fear of market downturns. Over time, the businesses you own will grow, and so will the income they generate for you.

The Importance of Temperament

Finally, it’s worth remembering that investing is not just a numbers game; it’s a behaviour game. Investors who remain calm, rational, and disciplined in the face of uncertainty are often the ones who see the best results. A good temperament, alongside the patience to allow your investments to grow over decades, is one of the greatest assets an investor can have.

Owning great businesses through globally diversified, low-cost index trackers is one of the most effective ways to ensure a secure financial future. By focusing on ownership rather than lending, maintaining a long-term perspective, and managing your behaviour, you can build a retirement portfolio that not only sustains you but grows in a way that outpaces inflation.

So, can you imagine it? A retirement where your money never runs out, and your income grows faster than the cost of living. It’s not just a dream; it’s a reality for patient, disciplined investors.

You can find out more about how to become a savvy investor and how to not make common investing mistakes here: www.saverbehaviour.co.uk