For most investors who go down the passive income route, it is no more than a way to add a little extra cash every year. This is because the average yield of the FTSE 100 is around 3.4%. And for investors working with smaller sums of cash, this amounts to little compared to the lure of investing in trending stocks that could skyrocket in a year.

We are all aware of the power of compounding returns. What if I combine the safety of passive income and the power of compounding returns to boost long-term earnings? Can this strategy help me turn my passive income into a retirement-worthy sum?

DRIP investing to boost passive income

Short for ‘dividend reinvestment plan’, DRIP investing is a less-explored style of using passive income, which could grow returns over the long-term by two or even three times (3x). The idea is simple: every time I receive a dividend payout from my investment, I reinvest it back, repurchasing shares in the same company.

This strategy allows me to increase the number of shares I hold in the company. And this, in turn, boosts my payouts every year, which allows me to repurchase a larger chunk of shares. And as I follow the Foolish investment philosophy of investing for the long term, this could vastly boost my returns if I pick the right dividend stocks.

DRIP vs normal dividend investing

Allow me to demonstrate the possible returns with the magic of mathematics. I have chosen dividend aristocrat Legal & General (LSE:LGEN), which has a current yield of 7.4% and has historically generated strong capital every year (with plans of boosting yield year on year).

I am willing to invest a £10,000 lump sum investment in the company with plans of holding it for 30 years. This would get me 4,098 shares at the current share price of 244p. I am placing the average yield of Legal & General shares at 5% (accounting for fluctuations) paid annually, with a 3% increase in yield every year and 0% share price growth.

Without DRIP investing: after 30 years 

Final investment value: £10,000 (assuming 0% share price growth) 

Final dividend income: £23,785.61 

Total investment returns: £33,785.6

With DRIP investing: after 30 years

Dividend contribution: £88,146.52

Total investment returns: £98,145.64

It is clear that, over time, this passive income strategy could yield nearly 3x more than just holding dividends. And at the end of 30 years, I would own 35,983 shares in the company.

Although I assumed a share price growth of 0%, it will fluctuate. If there is a fall in share price, the yield could go up in relation, boosting my returns. If there is share price growth, I could turn my £10,000 to £100,000 with this strategy.

Risks to consider

A passive-income strategy comes with risks, too. Any company could cut dividends if revenue is affected. And for Legal & General, economic turbulence could affect income as it operates in the finance sector. A long history of dividend growth does not guarantee future returns. And for this strategy to succeed, a steady payout is absolutely crucial.

It is clear that picking a winning passive income share is the first step. But I think by sticking to blue-chip dividend shares and being diligent, I could vastly boost the earning capacity of my portfolio using the DRIP method.

The post The secret passive income strategy I’m using to try to 3x my returns! appeared first on The Twelfth Magpie.

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• Here’s why I bought this 7.6%-yielding FTSE 100 dividend stock instead of saving in a Cash ISA
• How much would you need in a Stocks and Shares ISA to match the State Pension?
• Here’s a quick and easy way to start earning passive income this summer with a spare £1,000
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Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Today I’m going to talk about the one thing all new investors must learn and all experienced investors must remember. The fact that we’ve just experienced the worst quarter for stock markets since 1987 makes it even more relevant.

The most important thing

Forget all the fancy money-making strategies you’ve heard. To really increase your wealth, it’s more important to understand the concept of ‘compound growth’.

We experience compounding in everyday life, usually without even recognising it.

Suppose you want to get fit and decide to dedicate 10 minutes a day to exercising. Initially, progress is slow. Over time, however, workouts become easier and your body can do more.

The reason for this is simple: every bout of exercise builds on those previously completed. 

Compounding can work against us too. Allowing ourselves an extra portion of something calorific at dinner might not feel wrong at the time. The result of doing so many times over many evenings, however, eventually shows on our waistline. 

The little things we regularly do add up.

So, it can make me rich?

Yes. Compounding is the not-so-secret sauce that can also make you wealthy. 

Imagine investing £20 in the stock market every month (or £240 per year) for the next 30 years. Over this period, markets rise in value and you re-invest any dividends you receive.

Although the actual rate of return will vary from year to year, let’s say your portfolio returns 10% per annum. So, after one year, your money increases in value by 10%. In the second year, the money you had after the first year increases by 10% and so on. 

After 30 years, you’d have nearly £40,000. It’s grown by so much because you’ve earned interest on interest every year. Your money has compounded. 

Remember, this is the hypothetical result of investing just £20 per month. Put away £50 a month and you’ll have almost £99,000 based on my figures. £100 a month will give you over £197,000. It’s not magic, it’s simple maths. 

The only caveat is that there’s no guarantee the stock market will return that 10% average per year. It could be lower or higher, depending on what you choose to invest in and how those investments perform. 

Dedication required

Compounding can make you rich, but it still requires two things from you: commitment and patience.

Just as practicing the violin once every year won’t lead to any meaningful gains in terms of ability, saving ‘when you feel like it’ is unlikely to substantially increase your wealth.

This is why setting up a direct debit to take even a small amount of money from your bank account to your ISA every month without fail is crucial. By automating your savings, you take out the need to be motivated to save.

Second, learning to delay gratification is vital. Warren Buffett’s wealth has increased massively in later life because he recognised that results aren’t immediate. He continued to invest, through good times and bad. 

Which brings me back to the start. Having the courage to invest through market wobbles is desirable since it allows you to buy more when prices are depressed. The more stock you accumulate at lower prices, the greater the eventual upside will be.

Forget the market crash. Remember the power of compound growth.

The post Forget the stock market crash. Knowing this could help you retire rich appeared first on The Twelfth Magpie.

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• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

I suspect the answer to this, at least according to research, might surprise you. 

To lump or to drip?

Investing all your money in the stock market in one fell swoop does, of course, ensure that it goes to the very place that’s proven to outperform all other asset classes over the very long term. The quicker you put it to work, the more you’re likely to benefit from the magic that is compounding.

Given that cash payouts have been found to make up the majority of eventual returns (assuming they’re reinvested back into the market rather than spent), investing ‘immediately’ also allows you to receive dividends from companies whose shares you own.

On the downside, lump-sum investing feels decidedly risky. After all, you could be buying at the very moment markets are peaking.

Drip-feed investing (or ‘pound-cost averaging’) neatly avoids this. By regularly investing the same amount every month, you’ll buy some stock when prices are high and some when prices are low, thus smoothing out your returns over time. 

A drawback of this approach, of course, is that no one knows where markets are going next. So, while drip-feeding works wonders in a falling market, the opposite will leave you with far less stock than if you’d gone ‘all-in’ from the off.

Another potential issue to the drip-feed approach is that it can be hard to decide exactly how much you should invest every month when you’re working with a lump sum. To complicate matters, the longer this money stays in your cash account, the more likely its value will be eroded by inflation. 

What does the evidence say?

It might surprise you to learn that according to a study conducted by US passive investing powerhouse Vanguard back in 2016, lump-sum investing generates better returns than its drip-feed counterpart roughly two-thirds of the time. 

This was true regardless of asset allocation (e.g. whether you had all your money in equities, all in bonds or a 50/50 split) and whether your money was invested in the US, UK or Australian markets. Nevertheless, the average outperformance of lump-sum investing wasn’t that big (2.39% in the US, 2.03% in the UK and 1.45% in Australia).

So, I should just invest it all?

Not necessarily. While Vanguard’s research suggests that lump-sum investing generates slightly superior returns more often, this doesn’t automatically make doing it any easier, particularly at times when markets are looking expensive (such as the US right now).

If investing everything at all once will keep you awake at night then the potential for slightly lower returns through the drip-feed approach might be a price worth paying. You may even get lucky and see markets fall over the time you’re investing.

That said, Vanguard does recommend moving money into the market over no more than one year so that you aren’t in cash for too long. If you fear a crash, this could involve increasing your allocation of less volatile assets such as bonds and moving into equities at a later date.

The post The surprising truth about lump sum vs drip feed investing appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Soon I had enough saved and accrued interest to make a larger purchase. One day I withdrew most of my savings and bought my first adult-sized bicycle.

The power of compounding

Then I forgot about my post office savings account altogether and never used it again. Years past. Then, when moving home, I found my old post office savings book.

The book showed a deposit of around £4. I hadn’t entirely emptied the account when buying the bike all those years ago. Although tempted to forget about it, out of curiosity I went back to the same post office on the corner and presented the book. To my amazement, the same man (but looking 15 years older) put the book under a special machine that whirred and typed and printed out line after line of interest that had accrued over the years on the money in the account.

When it had finished he handed me £18.76. I was amazed the money had grown so much, but that’s the power of compound interest, where interest is added onto the principal amount and onto accrued interest. Compound interest makes money get larger and the rate of expansion accelerates over time.

In the post office account, my money probably kept pace with inflation and no more. So in terms of spending power, I ended up with a similar amount I started with. However, historically, the stock market has delivered total returns to investors in excess of inflation, which means the process of compounding can work to grow the real value of your money over time and create wealth.

Building wealth with shares

I wish I’d embraced the concept of compounding more fully when I was 25 and invested regularly on the stock market. For example, saving just £500 per month for 30 years and earning an average return of 8% a year on the stock market will deliver a pot of savings worth just over £700,000. I wish I’d done that with my money starting all those years ago.

If I was starting at 25 now, I’d put money each month into the stock market via a low-cost, passive index-tracking fund, such as one that follows the fortunes of the FTSE 100 index, or perhaps the FTSE 250 index. Alternatively, I’d invest regularly into larger, stable and dividend-growing shares.

There are many ways to approach stock market investing. But the key to success, in my view, is to keep the idea of compounding in mind.

The post The one thing I wish I’d done with money when I was 25 appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

One of the most misunderstood things about growing your wealth via the stock market is that you already need to have a lot of money to make more of it.

So long as you’re prepared to make a few sacrifices and choose the most cost-effective approach, this simply isn’t true. 

Save where you can

Notice that the title of this article refers to being ‘broke’. By this, I’m referring to having no money left over at the end of the month after taking into account discretionary spending. Quite rightly, those in more difficult situations (those carrying debt, for example) will have different priorities.

For everyone else, however, this is where you start. Make a note of all your spending over a single month — every last penny — and work out what you can cut out. This isn’t about adopting a monk-like existence, it’s about seeing what things you can genuinely live without. 

An example? Let’s say you buy coffee every weekday morning at £2.50 a cup. That’s £55 a month based on 22 days of caffeine fixes. If you can drop this habit, your wealth-generating journey is ready to begin.

Start small

Having cut back, it’s time to put any cash you have managed to save to work in the stock market (preferably within a tax wrapper such as a Stocks and Shares ISA).  

Since your contributions are likely to be small to begin with, it’s likely that investing in individual company stocks will be far too risky and expensive. They’ll be plenty of time for that as your confidence and/or the amount you’re able to save every month increases.

Investing in a fund run by a professional manager is an option, but study after study has shown that the vast majority of these underperform the market after fees have been deducted.

For someone just finding their feet, I think a global exchange-traded fund or tracker is one of the best options available. You can find more details here. 

Smooth out the bumps

Those only able to invest a little a month have one advantage over those with a bigger amount to invest. Throwing all (or significant lumps) of your cash into equities in one go could be very unpleasant — at least in the short term — if markets suddenly tank.

Investing on a regular basis tends to be less risky because your money will buy more shares when prices are low and less when prices are high.  This method — known in the business as ‘pound cost averaging’ — is perfect for those who don’t have time to monitor their investments since it helps to smooth out returns. 

There’s another positive to regular investing. The commissions charged by platforms are low (as little as £1 per trade), at least relative to the usual costs of buying stock. The reason for this is that orders are bundled together and executed once a month. Since we’re not advocates of attempting to time the market here at the Fool anyway, that’s alright by us. 

Bottom line

Remember that £55 a month saving? Over 30 years, this would grow to a little over £62,000 (excluding fees), assuming an annual return of 7%. That’s surely worth sacrificing a few coffees for.  

The post Want to begin investing but broke? Here’s how to get started appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

There is such a thing as being overly cautious, however. Here are three reasons why continuing to buy at least some stock at the current time could still be a good idea.

1. Time in the market, not timing the market

While we can be fairly certain that markets will crash at some point in the future, no one knows where they’re going over the short term. That’s right, no one. The FTSE 100 at 8,000? It’s still possible.

This is why many experienced market participants are aware that staying invested and allowing your wealth to compound is preferable to attempting to jump in at the bottom (or leave at the top).

To be clear, you can invest at the height of the bull market and still make a lot of money. As US blogger Ben Carlson commented, someone who began investing with $6,000 in 1972 — and only invested at market peaks (e.g. December 1999, October 2007) — would still be a millionaire in 2013, assuming he/she never sold, held a low-cost fund that tracked the market and saved diligently in the run-up to pulling the trigger.

2. Benefit from pound cost averaging.

If we take it as read that no one knows the future for certain then it makes sense to gradually drip-feed money into the stock market rather than withhold it altogether.

This strategy — pound cost averaging — helps to smooth out the bumps in returns. Assuming you routinely invest the same amount, this simply means buying less of something when the price is high but more of the same thing when its value dips.

Another positive to investing on a regular basis is that it can be far cheaper. Whereas a single purchase on a random trading day usually involves paying the maximum commission that your stockbroker can charge, regular investing can be done for just £1 a month.

Costs add up over time. Minimise these as soon as possible in your career and reap the benefits at the finish line.

3. Receive (and reinvest) dividends

A final argument for continuing to invest at least some of your cash relates to dividends.

Let’s use Lloyds Bank as an example. The FTSE 100 behemoth is currently forecast to yield a stonking 5.6% in 2018. Compare that to the paltry 1.35% you’d receive keeping your cash stashed in the best instant access Cash ISA. Yes, you’re paid to take on more risk but, with Lloyds already trading at 8 times forecast earnings, it’s not unreasonable to suggest that a lot of this appears priced-in.

Moreover, the fact that the payout is expected to be covered twice by profits suggests that the likelihood of these being cut soon is slim. Even if they were, owning stock in 15-20 companies (or some income funds) should ensure that you’re protected if a few encounter problems.

A final bonus: reinvesting dividends when markets are struggling also means better returns once the latter inevitably recover.

The post Don’t wait for the next crash. Here are 3 reasons to invest NOW appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Then there are those whose purpose and identity in life seemed so entangled in their career or work that when retirement arrives there’s nothing much left in their lives and they tend to say things like, “I feel like I’ve been tossed on the scrapheap.”

Cry freedom!

What if you retire early though, because you have enough money to never work again if you don’t want to?

My guess is that if you retire like that the road ahead will likely be full of action and fun, and retirement will end up being a positive experience. Consider these potential benefits of retiring early with money to support you.

1. Time

There will be no need to work for income if you don’t want to. Therefore, you can pursue other interests, perhaps occupations that don’t require relentless early morning starts.

2. Choice 

You can fill your days doing whatever you want. Relieved of the necessity of earning, the choice is yours. Family? Golf?  Writing that book? Creating a prize-winning garden? You can even go back to work if you want, perhaps switching to something you love for a change or maybe volunteering with a charity.

3. Balance

For most, juggling family plus other commitments and interests with work often leads to life being out of balance. Often, work takes more out of our lives than it should. 

Early financial retirement would give you the chance to restore your life balance and enjoy all the benefits that would flow from that.

How to do it

Assuming you have some kind of income, the first step to building enough wealth to retire on is to save some money on a regular basis. Once you start to build up a pot of funds you’re in the powerful position of being able to scale up  your funds by compounding. 

The principle of compounding is your ticket to an early retirement. Compounding allows your wealth to expand without you having to labour for more hours. Your money is working hard for you — earning interest and interest on the interest, and so on.

Keep earning, keep saving, keep compounding and early financial retirement could be closer than you imagine. To speed up the compounding process and to enjoy larger returns, many turn to investing in the stock market. 

Evergreen defensives

Shares, in general, have a good long-term record of returns for investors and make good vehicles for compounding if you stick with defensive, growing companies and avoid the firms that have riskier businesses. Defensive firms tend to operate evergreen businesses that are less affected by the ups and downs of the wider economy. 

By carefully selecting shares and reinvesting dividends back into these firms, it’s possible to compound faster than simply saving money in a bank account. As well as compounding, an underlying business that’s growing can push up dividend payments and share prices, which could add even more impetus to propel you to an early retirement.

The post 3 reasons to retire early (and how to do it) appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Step 1 – cultivate a strong work ethic

Becoming a millionaire starts with a mindset, which manifests as determination and effort. I don’t believe in get-rich-quick schemes — many of which could end up making you poorer — but I do reckon it’s necessary to cultivate a strong work ethic.

If you have the ambition to become rich, my guess is that you’re already prepared to work hard to achieve your goal. However, hard work alone isn’t enough, and in some cases can get in the way of building a fortune. To really get on your way, you need to take step two.

Step 2 – scalability and planning

You need to plan to become rich and map out the route you’ll take to get there. One idea that could help is scalability. 

I would argue that you can really take off on the road to your fortune if your income becomes scalable and not linked to the time you spend working. Too much hard work can end up getting in the way of making big money. If you’re paid by the hours you work, your income is capped by the number of hours you work. 

Many businesses and professions generate scalable income by charging fees and commissions not directly linked to hours worked. Think of actors, writers, musicians, estate agents, accountants and solicitors, for example. 

Simple hard work isn’t enough. You need to ‘box clever’. No matter how you earn a living, you can introduce the benefits of scalability into your finances by taking advantage of compounding. Steps 3 and 4 present some ideas on how to do that.

Step 3 – become a super-saver

This is an old message with a twist. Live below your means, yes. Save all you can and regularly, yes. Most people who’ve accumulated a fortune have done those things. However, if you view the process of saving as a way to make your income scalable the power of saving as a wealth driver really shines.

Saving money and accumulating interest puts you on the road to compounding, where your saved money earns interest, the interest earns interest, the interest on the interest earns interest and so on. Your money is earning for you without you working — that’s scalability, and it will propel you towards your goal of millionaire status.

Step 4 – invest for the long term

Think of investing as a way to compound your money. You can invest in many things, such as property and bonds, but shares on the stock market have the best long-term record of returns. 

Saving money is good for compounding, but investing can be even better if you stick with defensive, growing companies and avoid the perils outlined in step 5.

Step 5 – don’t take crazy investment risks

One of the most ruinous philosophies around is that the young can afford to take on more investment risk because they have time for their funds to recover if things go wrong. 

The laws of compounding mean that losses early on in your investing career can cost you dearly in later life. A pound you own  today can compound into many hundreds of pounds down the line. But a pound you lose is gone, along with all the hundreds of pounds it might have later become.

The post 5 lucrative steps to get you to a million appeared first on The Twelfth Magpie.

More reading

• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?
• Up 95%! This FTSE 100 stock’s outperformed Nvidia over the past year
• With a 9.3% yield, is this an amazing opportunity to consider buying dirt-cheap Taylor Wimpey shares?
• How much do you need in a Stocks and Shares ISA to aim for £375 a week in retirement?

However, investing by aiming to predict macroeconomic outcomes is a pursuit fraught with difficulty. You’ve probably heard the term ‘sector rotation’, which is what some fund managers appear to do at times to back their macroeconomic judgements.

But exceptional investors such as Warren Buffett don’t bother with any of that stuff. He’s well-known for not trying to predict what the economy might do and for focusing on what the companies he’s invested in are saying about their businesses.  

Evergreen businesses

I’m keen on defensive businesses that are growing. These are firms that deal in some kind of evergreen consumer product that continues to see stable demand from customers whatever the economic weather. Such firms tend to generate consistent cash flow that drives rising dividends. 

If the Trump effect is pushing the share prices of these great firms down now, I’m rejoicing, because quality items don’t go on sale very often. Other investors can rotate away all they like, but I’m buying more of the defensives, because I think they will deliver a good total return for me over the long haul.

Pharmaceutical giant GlaxoSmithKline (LSE: GSK) and energy provider SSE (LSE: SSE) are two growing defensive firms with share prices that have weakened since the US election. GlaxoSmithKline is down just over 10% since October and SSE has eased by more than 8%. 

Decent forward prospects

At today’s 1,546p share price, GaxoSmithKline trades on a forward price-to-earnings (P/E) ratio of 14 for 2017, and at 1,469, SSE’s forward P/E ratio sits around 12. Taken together with forward dividend yields of 6.3% for SSE and 5.2% for GlaxoSmithKline, these valuations don’t look too rich given the firms’ forward prospects.

City analysts anticipate 10% growth in earnings for GlaxoSmithKline during 2017 and a 4%  uplift for SSE. Meanwhile, in recent updates, both firms remain upbeat about their own short-, medium- and longer-term prospects.

It seems unlikely that Trump’s presidency will have a detrimental effect on either GlaxoSmithKline’s or SSE’s ability to keep grinding on, generating cash and paying an ever-increasing dividend. So owning shares in these firms gives investors an opportunity to gather those dividends and reinvest the proceeds into these same firms to create a compounding pot of invested funds.

Watching the downside as your funds grow

I reckon a focus on compounding with growing, defensive businesses like these is one of the most effective ways to protect your portfolio from downside risks while growing your capital. Such an approach is what worked so well for Warren Buffett. He tends to buy more of the great companies he owns when their share prices fall, and Trump-induced share price weakness now looks like an opportunity to get a head start on the compounding process, if you stick to growing defensive firms such as GlaxoSmithKline and SSE.

The post Trump-induced share weakness is an opportunity with these 2 firms appeared first on The Twelfth Magpie.

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• How UK shares could build a £339,849 ISA

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

There always seems to be something to worry about, but that hasn’t stopped shares outperforming all other major asset classes over the long haul. 

Going back to a more youthful me

Successful investors such as Warren Buffett have done well investing through all kinds of worrisome times, so if you’re thinking about investing in shares, right now is as good a time as any.

I’ve been investing in shares on the stock market for around 20 years, but if I could wind back my age and start again with just £10,000, I’d go about it a little differently. For example, I think one of the most damaging philosophies in investing is the idea that the young can afford to take on more risk because they have time for their funds to recover if things go wrong. 

The laws of compounding mean that losses early on in your investing career can cost you dearly in later life. When I read Warren Buffett’s autobiography The Snowball, I realised how obsessive he had been about making every dollar work hard for him throughout his life. He always knew that a dollar he owned could compound into many hundreds of dollars later if he invested it wisely, and a dollar he lost wouldn’t compound into anything. To him, losing a dollar was like losing the hundreds of dollars it would have become and he, no doubt, felt the pain of that loss accordingly.

Watching the downside with compounding

So a rebooted younger me would watch the downside much more carefully in an effort to avoid losses before anything else. To do that, I would focus on compounding above other things and not on growth or value or any other strategy. Well-known outperforming fund manager Neil Woodford does that. His biggest concern is the reliability of the dividend payments his investee firms can offer and how much potential they have to keep raising the dividend payout year after year. He seems to consider any capital growth he sees from share prices going up as a bonus.

I would go for defensive growing businesses with my £10,000 with the aim of holding on to my shares for the long haul and reinvesting all the dividends back into those firms at opportune times, such as when the stock market pulls back. I see defensives as on the opposite side of the investing spectrum from cyclicals and more likely to be able to keep up dividend payments whatever the economic weather. Defensive businesses are among the least affected by macroeconomic events such as recessions and you can find them in sectors such as pharmaceuticals, utilities and consumer goods like detergents, foods, tobacco and alcohol.

To keep trading costs and portfolio management time down I’d probably invest my £10,000 in four firms diversified across defensive sectors, but without straying into cyclicals such as banks, housebuilders and commodity firms, no matter how attractive their dividend payments looked. Having done that, I’d adopt a long-term, business ownership mindset, repeating the entire process every time I had new money to invest.

The post How I’d invest £10,000 right now appeared first on The Twelfth Magpie.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.