Building a retirement nest egg that can provide a passive income in older age is not an easy process. After all, there are such a large number of options in terms of the types of assets available to buy that determining where to invest your hard-earned cash can be tough.
One potential solution is to follow the advice of successful investors such as Warren Buffett. Clearly, this does not necessarily mean that you will become a billionaire, but his views on areas such as market cyclicality, leverage and identifying the best businesses in a specific industry could help you to build a £1m+ portfolio for retirement.
Market cyclicality
Since Buffett’s time horizon is long term, he is able to wait for stocks to trade on appealing valuations. This can take many years in some cases. However, the FTSE 100 and FTSE 250 have always experienced bear markets following their growth periods. As such, there has never been a perpetual bull market in their history.
This could mean that undertaking the majority of your purchases during periods when the stock market experiences a bear market is a sound strategy. Certainly, it may lead to paper losses in the short run due to it being difficult to accurately predict the very bottom of a downturn for the stock market. But through buying shares while they trade on low valuations and at discounts to their intrinsic values, you may be able to obtain a more favourable risk/reward opportunity.
Leverage
While many people have sought to plan for retirement through using buy-to-let properties, Buffett has always stuck to the stock market. One reason for this could be his negative views on leverage. He has been quoted saying “if you’re smart you don’t need it… and if you’re dumb then you have no business using it,” when discussing the use of leverage in investing.
As such, borrowing money to invest in property could lead to significant risks for investors. Property prices in the UK could fall during what is likely to be a period of political uncertainty, while tax rises and the potential for increasing interest rates could reduce overall returns in the coming years.
A better idea could be to invest in shares without using leverage. This may mean lower risks, while the impact of compounding on returns over the long run could prove to be surprisingly high.
Quality businesses
As a value investor, Buffett focuses on paying a low price for high-quality businesses. The quality of a business is sometimes an aspect of investing that some investors overlook. However, a company that has been able to grow its profits at a fast pace over many years, and which has a solid growth strategy, may be worthy of a premium versus its peers.
Therefore, rather than seeking the cheapest stocks, buying the best companies at fair prices could be a shrewd move. It may enhance your investment returns and increase your chances of retiring with a million.