Warren Buffett’s track record of generating high returns means that following his advice could be a sound means of improving your retirement prospects.
Certainly, there is a risk that a second stock market crash will occur in the coming months. However, through buying high-quality stocks at low prices, and focusing on the long run, you could generate impressive returns that bring forward your retirement date.
Investing in the stock market
Warren Buffett’s capital has always been focused on the stock market. Although he has held significant amounts of cash, this is to provide security and the liquidity required to buy more stocks, rather than to generate a high return.
As such, following his lead and using the stock market to build a retirement nest egg could be a sound move compared to purchasing other assets. Although other mainstream assets such as bonds and property may hold some appeal at the present time due to ongoing economic risks, the past performance of the stock market shows that a recovery is very likely. Therefore, it could produce significantly higher returns than other asset classes, and make a greater positive impact on your retirement plans.
Warren Buffett’s focus on quality at a low price
Warren Buffett has always sought to purchase high-quality businesses when they trade at low prices. For example, he has bought companies that have wide economic moats. This essentially means that they have a competitive advantage over the peers that enables them to generate higher levels of profitability. When purchased at an attractive price, such companies allow investors to obtain a relatively favourable risk/reward opportunity.
At the present time, many stocks are trading at low prices. In some cases, their low valuations may be deserved due to their difficult outlooks. However, in many cases, weak investor sentiment towards specific industries and sectors may provide buying opportunities for long-term investors. Undervalued stock may be able to deliver improving financial performances as the economic outlook strengthens, which could lead to impressive capital returns.
The prospect of a second stock market crash is unlikely to worry long-term investors such as Warren Buffett. He has always been comfortable with the idea of short-term volatility in the stock market, since he has a long-term view of his holdings. This has enabled him to buy when the stock market’s outlook is very uncertain and stock prices are relatively low.
Since many investors who are seeking to build a retirement nest egg are likely to have a long time horizon, short-term downturns should not be a major concern. In fact, they could provide further buying opportunities that enable you to add stocks to your portfolio and further benefit from the stock market’s growth potential over the coming years.
Motley Fool contributor Peter Stephens has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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