Investing £5k, or any other amount, in UK shares today may not necessarily seem to be a sound means of improving your prospects of retiring early. The stock market faces a challenging period in the near term due to a weak global economic outlook.
However, following the advice of successful investors such as Warren Buffett could improve your return prospects. His long-term viewpoint and a focus on obtaining a wide margin of safety may boost your portfolio returns to help to bring your retirement date a step closer.
A long-term focus on UK shares
In the coming months, risks such as rising unemployment and lower GDP growth could mean that many UK shares experience challenging operating conditions. This may lead to a fall in their prices that causes many investors to avoid them.
However, the best time to buy stocks has historically been when their risks are relatively high. For example, the FTSE 100 and FTSE 250 faced significant risks during the last major downturn in 2008/09. As a result, their price levels declined by over 50% in total.
While this caused paper losses for investors in the short run, over the following years both indexes recovered to post new record highs. Although the same outcome cannot be guaranteed following the current economic downturn, taking a long-term approach when buying UK shares could enable you to take advantage of a likely recovery.
Warren Buffett has always been comfortable holding stocks for the long term, and has largely ignored their short-term prospects. Doing likewise could mean that you are able to buy undervalued shares today, and benefit from their recovery prospects over the coming years.
Economic moats
Of course, some UK shares may struggle to survive the short term. Their operating conditions may be very challenging, which could put their financial positions under strain.
Therefore, following Buffett’s advice and buying businesses that have wide economic moats could be a shrewd move. An economic moat essentially equates to a competitive advantage, which could range from a unique product, to a lower cost base, or even a stronger sense of loyalty among customers.
Through buying UK shares that have wide economic moats, you may be able to further reduce the risks faced by your portfolio. It could even lead to higher returns in the long run, since those companies with wider economic moats today may be well placed to benefit from a likely recovery. They may even be able to increase their market share at the expense of other companies.
Certainly, it may take time for any stock to recover from what has been a major economic setback. However, Buffett’s track record shows that the stock market offers a relatively sound means of generating high returns over time that could improve your financial position and help you to retire early.