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No savings at 40? I’m investing like Terry Smith to target a £39,252 passive income

pensive bearded business man sitting on chair looking out of the window
Image source: Getty Images

One way I’m looking to build a healthy passive income in retirement is by following the key investing principles of Terry Smith.

Mr Smith’s flagship Fundsmith fund has generated a whopping total return of 469.4% since its inception 22 years ago. By following some of the fund’s core investing values I could also generate impressive long-term returns.

Past performance is no guarantee of future success. But I think some of his principles could go a long way to helping me build a big nestegg for when I retire.

2 Terry Smith tricks I use

It may sound like an obvious trick. But adding stocks “whose advantages are difficult to replicate” (as Fundsmith’s factsheet explains) is one of the reasons Terry Smith has been so successful.

Companies with competitive advantages (like market-leading brands) have a stand a better chance of growing profits even during difficult times. Stocks whose products enjoy strong brand recognition can grow market share, and they can raise prices without suffering a sharp fall in volumes.

This is why I’ve added FTSE 100 stocks Unilever and Diageo to my own shares portfolio. Consumer staples firms like these form a sizeable chunk of Fundsmith’s own portfolio (33.8% as of 30 November, in fact).

Reducing risk is another way Fundsmith has made those whopping returns. A simple way it does this is by holding stakes across a large range of companies spanning multiple sectors and geographies.

Even if one stock provides disappointing returns, performance across the rest of the portfolio can potentially offset this.

Today, Terry Smith’s bellwether fund holds stakes in 29 companies across sectors like consumer goods, technology, healthcare and communication services.

My own portfolio contains around 25 that are spread across multiple industries. These include mining giant Rio Tinto, UK medical business Spire Healthcare and US-focused rental equipment supplier Ashtead Group.

Market-beating returns

The average UK share investor has enjoyed an average annual return of 10% over the past decade. But following the method of investing legends like Terry Smith, Warren Buffett or Nick Train, I’m confident I could generate a yearly return of between 12% and 15%.

This sort of return could set investors like me on the path to generating brilliant extra income in retirement.

Let’s consider a 40-year-old who can afford to invest £250 a month in UK stocks. They have no other savings or investments; they reinvest any dividends they receive; and they manage to achieve that 12% to 15% average yearly return.

By the time they reach their State Pension retirement age of 68 they’d have made a minimum of £572,097. If they achieved the top end of the range this person would have generated an even better £981,312.


This sort of sum that could make them healthy extra income in retirement without depleting their savings pot. By drawing down 4% of their accrued wealth per year, they’d have a yearly passive income of £39,252.

That’s more that the current average yearly wage. And it would likely remove an individual’s future dependency on the State Pension.

As I said, success on the stock market is never guaranteed. But studying the approach of successful investors like Terry Smith can help new and experienced investors alike build long-term wealth.

The post No savings at 40? I’m investing like Terry Smith to target a £39,252 passive income appeared first on The Motley Fool UK.

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Royston Wild has positions in Ashtead Group Plc, Diageo Plc, Rio Tinto Group, Spire Healthcare Group Plc, and Unilever Plc. The Motley Fool UK has recommended Diageo Plc and Unilever Plc. 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 2022