Billionaire investor Warren Buffett is known for looking for bargains. And with the 2022 stock market correction sending many stocks plummeting, countless high-quality companies are looking dirt cheap.
But in recent weeks, macroeconomic trends show that inflation is slowly coming under control. And with newfound hope that an economic recovery is underway, stocks are gaining momentum. So much so that the FTSE250 Index is up 15% in just one month!
Whether this is just a short-term bounce or the start of the long-awaited stock market rally is uncertain. But if it’s the latter, then time is running out to take advantage of discounts. And it seems even the “Oracle of Omaha” has been buying lately, investing more than $9 billion between July and September.
As crazy as it may seem, with all the volatility, buying stocks today could unlock significant long-term wealth. In fact, even a 40-year-old investor starting from scratch can build a pretty large nest egg today.
Retire comfortably with Buffett’s tactics
Over the past decade, the FTSE 250 has returned an impressive 11% annually, including dividends. That might not seem like much, but put together over decades, it’s quite substantial.
As the average UK retirement age rises from 65 upwards, a 40-year-old investor has around 25+ years to build a meaningful retirement fund. Luckily that’s a lot of time.
Assuming an investor can match the 11% return of the index and put £500 a month into an investment portfolio, the nest egg after 25 years would be just under £800,000. Applying the classic 4% withdrawal rule, that means passive retirement income of around £32,000 a year – more than triple the current state pension.
But with so many high-quality companies trading at massive discounts today, investors who adopt Buffett’s buying strategy could see market-beating performance. Even if it’s just 1% more, that’s enough to turn £32,000 into £37,600. And the best thing is that all these gains are tax free by using Stocks and Shares ISA.
Take a step back
As exciting as this long-term perspective sounds, there are a few caveats to keep in mind. First, 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.
Additionally, 2022 has kindly reminded everyone that stock market crashes and corrections can and do happen. As a result, once thriving portfolios can quickly wipe out years of growth in just a few months. And while the stock market has a perfect track record of recovery, the process can take time — years in some cases.
Over the next two and a half decades, the likelihood of multiple periods of volatility seems highly likely. And depending on the timing of these events, an investor’s pension fund could be worth significantly less than expected, even if it follows in Buffett’s footsteps.
Nonetheless, buying long-term stocks of quality companies at bargain prices is a proven wealth-building strategy. And so, even if there are risks, it could be a smart move for patient investors to invest today.
The views on the companies mentioned in this article are those of the author and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a multitude of insights is what counts us better investors.
Motley Fool Germany 2022