Billionaire Warren Buffett is often touted as the world's best value investor. But the investing great denies being a stock picker. Instead, he is a self-described business picker – he buys shares in businesses he believes will succeed and, like any other business owner, he holds on for the long haul. Thus, if you're in your mid-forties without any investments up your sleeve, you can use Buffett's wisdom when building retirement wealth.
What's the magic secret behind much of Buffett's wealth? It is, of course, compounding.
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Warren Buffett's (not so) secret: Compounding
Any investor has the potential to take advantage of compounding – even with no investments at age 45.
Buffett buys shares in companies he truly believes will perform well and invest in growth. That is, as long as they're trading for a decent price.
Measures such as a company's price-to-earnings (P/E) or price-to-book (P/B) ratios can come in handy when assessing if a share is trading below its intrinsic value.
After finding such shares, he holds onto his investments and lets compounding do its thing.
Building a diverse portfolio of ASX shares likely to post consistent returns is, in my opinion, one of the best and perhaps safest ways to capitalise on compounding.
Now, how quickly one can build their portfolio will be a major factor in the kind of growth they achieve.
What would it take to compound retirement wealth?
Say, if I were 45 and starting my investing journey from scratch, I would be aiming to build a $545,000 retirement nest egg. That's the amount the Association of Superannuation Funds of Australia estimates a single person needs to retire comfortably.
Let's also assume I could build a portfolio capable of posting the average annual return of the S&P/ASX 200 Index (ASX: XJO) over the 10 years to 2021 – 9.3%.
If I invested just $700 a month, I could surpass my wealth goal by the time I reached the Australian retirement age by investing like Buffett. That's under $200 a week!
Importantly, however, past performance is no indication of future performance, and no investment is guaranteed to provide returns or downside protection.
And what if one could outperform the market or invest more than our figurative amount each month? Well, that might help to speed up the process, potentially even allowing one to retire early.
Still, a 45-year-old with retirement in mind would be wise to consider other factors, such as their personal budget and inflation when considering an investment plan.
