If you follow Warren Buffett’s investing advice I think you could live off the income generated by your investments to do away with the pitiful State Pension all together.
UK retirement savers without the support of strong investments face life on a meagre State Pension of as little as £8,777 a year. If you’ve been paying in fewer than 30 years, you may get even less.
There’s a good reason why income investors hang on Buffett’s every word. He’s worth $82bn and is the world’s third-richest man. He’s also an incredibly prolific writer and not shy about telling it like it is. There are the annual letters to Berkshire Hathaway shareholders dating back every year to 1977, all of which are freely available to study.
Ignore the short term, think long
His highly anticipated 2019 letter features more good investing advice. “I have no idea as to how stocks will behave next week or next year. Our thinking is focused on calculating whether an attractive business is worth more than its market price,” he said.
Good companies can be undervalued, and remain good companies whether the market is pricing them right or not. “Focus on operating earnings, paying little attention to gains or losses of any variety,” he adds.
Markets will also overreact to the slightest whiff of bad news before correcting – even when the news isn’t that bad. “The stock market is a manic depressive,” he reminds us. For example, Lloyds bank recently raised its dividend by 5% and posted lower costs, yet the share price dropped by over 5%.
Warren Buffett says plant soon
“Someone’s sitting in the shade today because someone planted a tree a long time ago,” says Buffett. Starting to invest as soon as you can is almost as important as what you invest in. Time in the market is important, not timing the market to buy or sell in a rush.
Look at a chart of the FTSE 100 from its beginning in 1984 to today. See that general upward trend? Sure, there have been major sell-offs. But those that panicked and pulled their investments when they saw the sea of red just had to buy back in later at a higher price.
There might be a recession this year, or next. Or it might happen in 2021. Between now and then the stock market could go up by 10% a year and if you hold off you’ll lose out on the chance to compound your gains.
Don’t panic
“Patience is key…our favourite holding period is forever,” says the Berkshire Hathaway CEO. And there’s no cause for alarm if you’re just starting your investing journey.
Even if you’re in your mid- to late-50s and have no savings, you can still make a huge dent in the next 10 years before you retire. Ten years of compound interest, made by investing in good dividend-paying companies, bought for reasonable prices, should unlock a happy retirement.
In your mid-40s? That’s 20 years of compound gains if you start now. In your mid-30s? Even better. You’ve got three decades of reinvested dividends just waiting to be made.
There’s a great Chinese proverb that goes: “The best time to plant a tree was 20 years ago. The second best time is now.”