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How passive income helped me retire (really!) early

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home

I hadn’t heard of passive income back when I started investing. And I’ll admit it, I was nervous when buying my first share.

After all, I grew up in an environment where stock markets were considered dangerous, risky. They were something that only rich people played with.

But now, after almost 10 years of investing, that first stock– and others like it — turned out to be a key step to retiring early in my forties.

How did I start investing in shares?

I’ll be honest, I only started thinking about buying shares when other options, like savings accounts, started cutting interest rates. The further they fell, the more I knew I would have to do something different if I wanted to continue to grow my wealth.

So, I got curious. I started learning about how stock markets worked. Sites like The Motley Fool and the like are full of useful information, and I devoured them.

I was reassured by the long-term performance of stock markets, which was vastly different to the off-putting screaming ‘buy/sell now’ over-hyped headlines.

For example, if you look at the FTSE 100 over all the different 10-year periods it has been trading, you will get a range of annual returns from -8.7% to +19%. But no individual 10-year period has ever lost an investor money.

That was hugely comforting. Plus, the average 10-year return was around a healthy 8.9%. It was time to take the plunge and buy my first ever stock.

What was my first ever passive income share?

It might surprise you to learn that my first ever passive income share was the perhaps lesser known company called City Of London Investment Group (LSE:CLIG).

Why this company? I liked its track record of dividend payments, and it had a clear strategy for the future that made sense to me.

It was also out of favour in the markets, far down from its 52-week high of ~£4. I ended up buying 558 shares at £2.49, giving a dividend yield near 10%.

In fact, if I add up all the passive income I’ve received through dividend payments, it’s more than I paid for the original investment! And that’s ignoring the fact I could still sell those shares today for a healthy profit.

Those numbers might not look much to some, but I’ve since added to this and other holdings over the years. And then that’s when the real ‘magic’ happens. Slowly and steadily, you end up owning a substantial, diversified, passive income portfolio.

The truth of risk and reward

Now, I’m not sharing this to boast about my investment success. That’s not my style and they don’t all work out so well. I’ve had my failures, too, for sure.

But the real point here is, yes, stock markets are risky. It’s one of the hard truths of investing – reward needs risk.

But by investing over the long term, those risks are far more in my favour, so long as I diversify my portfolio and choose wisely.  

And that’s why I’ll continue to invest in good companies for the long term – after all, it’s the Foolish way!

The post How passive income helped me retire (really!) early appeared first on The Motley Fool UK.

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Michelle Freeman holds shares in City Of London Investment Group. The Motley Fool UK has recommended City of London Investment 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.