The income of retirees could prove to be highly disappointing over the coming years. Not only is the State Pension relatively low at £164 per week, but there are also plans to increase the retirement age. This could mean that people end up working for over 50 years, only to receive an annual State Pension which is well below the average wage in the UK.
One means of improving your retirement savings prospects could be to adopt the value investing style of Warren Buffett. He has become one of the richest people in the world through following what is a relatively straightforward investment style. As a result, most investors could easily tread a similar path in order to improve their financial prospects in retirement.
Value investing
Value investing is not a particularly popular investment style at the present time. The FTSE 100 has risen significantly in recent years so that it trades close to an all-time high. As such, many investors are bullish about the prospects for the index, and they are likely to be more interested in the growth potential of a company, rather than its value appeal.
However, by focusing on the value of a company, it is possible to generate relatively high returns over the long run. That’s because it is through buying shares that trade at a discount to their intrinsic value that investors can stack the investment odds in their favour. In other words, buying shares in companies that already have their future growth prospects priced-in is unlikely to yield high returns. But unloved stocks that are performing well from a business standpoint could provide an above-average total return in the long run.
Stock selection
Clearly, it is more difficult to find good value shares at the present time. The FTSE 100 is only a few hundred points away from its all-time high, and many shares listed in the index appear to be overpriced. However, there are still a number of shares which could prove to be value investing opportunities. Not all sectors have been part of the recent bull market, and so there may be discounted valuations on offer.
For example, the tobacco sector remains relatively unpopular despite the growth potential of e-cigarettes. Utility stocks continue to offer relatively low valuations, while healthcare, resources and retail companies could all provide value investing opportunities for the long term.
Such sectors may not deliver high returns in the short run. Investors could continue to shun them in favour of more cyclical industries that are performing well today. But with the economy and the stock market operating in cycles, unpopular stocks today could be the ones that are in high demand tomorrow. Through value investing, it is possible to capitalise on that cycle over the coming years and generate relatively high returns in the long run.
