Let me tell you what I mean... every month, quarter or however so often we should be buying shares (or any other investment) that generate a regular income. The first goal should be for your portfolio to generate one month's worth of your annual salary (or whatever amount you think you need to live off). Then after that aim for two months and then three months and so on. The end goal to be able to replace your annual salary with the income generated by your investments.
I think we become so fixated on the price of our investments and whether they are going up or down that we lose sight of the bigger picture. I propose forgetting about the price return of your portfolio (I can hear asset managers who focus on selling investment performance protesting). Rather focus on the income. Specifically, focus on your "Income Replacement Ratio".
Income Replacement Ratio = (Annual Investment Portfolio Income)/(Annual Salary)If you aim to achieve an Income Replacement Ratio of 100% then you are in the pound seat. It is not something that can be done overnight either. It requires a few key ingredients:
- Investing in companies that generate real (i.e. inflation beating) dividend growth (this is necessary as your annual salary will hopefully increase over time)
- Regular investments (invest at least monthly)
- Start early (don't leave this until you are 10 years to retirement. And trust me if you get this investment thing right and have a bit of good fortune you will be retiring well before you are 65).
- Patience and staying the course (don't get caught up with latest investment fads)
- Stop stressing about the macro factors (who would have thought the oil price would be 40% lower than it was a couple of months ago. Invest through cycles)
I am sure I have left off a couple ingredients but I think you get the picture. Thanks for reading my ramblings...