Billionaire investor Warren Buffett is known for always looking for bargains. And with the stock market correction of 2022 sending many stocks down, countless high-quality businesses look cheap.
But in the past few weeks, macroeconomic trends have shown that inflation is gradually coming under control. And with new-found hope that an economic recovery is underway, stocks are gaining momentum. so much FTSE250 The index has increased by 15% in just one month!
There’s no way to know for sure if this is just a short-term boost or the start of a long-awaited stock market rally. But if it’s the latter, then time is running out to take advantage of the discounts. And it looks like even ‘The Prophet of Omaha’ has shopped recently, investing more than $9 billion between July and September.
It sounds crazy, but with all the volatility, buying stocks today can unlock significant wealth over the long term. In fact, even an investor in his 40s starting from scratch can start building a sizable nest today.
Retire in Comfort Using Buffett’s Tactics
Over the past decade, the FTSE 250 has delivered an impressive 11% annual return, including dividends. That may not seem like much, but put together over the decades, it’s pretty substantial.
With the UK’s average retirement age rising from 65, a 40-year-old investor has around 25 more years to set up a meaningful pension fund. Fortunately, that’s a lot of time.
Assuming an investor can fit the index’s 11% return and pump £500 a month into the portfolio, then after 25 years a nest egg would be around £800,000. When applying the classic 4% withdrawal rule, this translates to passive income in retirement of around £32,000 a year – more than three times the current State Pension.
But with so many high-quality businesses trading at such huge discounts today, investors using Buffett’s buying strategy can effectively outperform the market. Even a 1% increase would be enough to turn £32,000 into £37,600. And on top of that, by using the Stocks and Shares ISA, all these gains are tax free.
Take a step back
As exciting as this long-term outlook sounds, there are a few caveats to consider. First, even if an investor can match the performance of the FTSE 250 (never guaranteed), the index may not continue to deliver double-digit returns.
Furthermore, as 2022 kindly reminds everyone, stock market crashes and corrections can and will happen. Thus, once a thriving portfolio can quickly see years worth of growth being wiped out in just a few months. And while the stock market has a perfect track record of recovery, the process can take time — in some cases, even years.
Over the next two and a half decades, the probability of multiple periods of volatility seems very high. And depending on the timing of these events, the value of an investor’s retirement fund could be significantly lower than expected, even following in Buffett’s footsteps.
However, consistently buying shares of high-quality businesses at bargain prices over the long term is a proven wealth-building strategy. And so, despite the risks, investing today can be a wise move for the patient investor.
The post Stock market correction: start buying stocks like Warren Buffett for retirement in style first appeared on The Motley Fool UK.
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Motley Fool UK 2022