Billionaire investor Warren Buffett has a reputation for seeking out bargain opportunities. And with the 2022 stock market correction sending many stocks plummeting, countless high-quality enterprises look dirt-cheap.
But in the last couple of weeks, macroeconomic trends show inflation is slowly getting under control. And with newfound hope that an economic recovery is underway, shares are gaining momentum. So much so that the FTSE 250 index has shot up 15% in just one month!
There’s no way to know for sure whether this is just a short-term boost or the start of the long-awaited stock market recovery. But if it’s the latter, then time is running out to capitalise on discounts. And it seems even the ‘Oracle of Omaha’ has been shopping lately, investing more than $9bn between July and September.
As crazy as it seems, given all the volatility, buying shares today could unlock substantial long-term wealth. In fact, even an investor aged 40 starting from scratch can start building up quite a large nest egg today.
Retiring in comfort using Buffett’s tactics
Over the last decade, the FTSE 250 has delivered an impressive 11% annualised return, including dividends. That may not seem like much, but compounded over decades, it’s pretty substantial.
With the average UK retirement age moving upwards from 65, a 40-year-old investor has approximately 25 years-plus to establish a meaningful retirement fund. Fortunately, that’s plenty of time.
Assuming an investor can match the index’s 11% return and inject £500 a month in an investment portfolio, after 25 years, a nest egg would be just shy of £800,000. When applying the classic 4% withdrawal rule, this translates into retirement passive income of around £32,000 a year – more than triple the current State Pension.
But with so many high-quality enterprises trading at massive discounts today, investors adopting Buffett’s buying strategy could lock in market-beating performance. Even if it’s just an extra 1%, that’s enough to transform £32,000 into £37,600. And, best of all, by using Stocks and Shares ISA, all of these gains are tax-free.
Taking a step back
As exciting as this long-term prospect sounds, there are a few caveats to consider. Firstly, even if an investor can match the performance of the FTSE 250 (which is never guaranteed), the index may not continue to deliver double-digit returns.
What’s more, as 2022 has kindly reminded everyone, stock market crashes and corrections can and do happen. Consequently, once thriving portfolios can quickly see years’ worth of growth wiped out in just a few months. And while the stock market does have a perfect track record of recovery, the process can take time – in some instances, even years.
Over the next two-and-a-half decades, the probability of multiple periods of volatility seems highly likely. And depending on the timing of these events, the value of an investor’s retirement fund could be worth significantly less than expected, even if following in Buffett’s footsteps.
Nevertheless, consistently buying shares in high-quality enterprises at bargain prices for the long term is a proven wealth-building strategy. And therefore, while there are risks, investing today could be a wise move for patient investors.