I’m 36 now and have been investing in stocks for a while. But I think even if I started today with no savings, I think I could still build wealth through buying shares. The key for me would be to follow Warren Buffett’s philosophy on investing.
Why I’m listening to Buffett
The mega-successful investor mostly buys US stocks, which since 1965 have seen an average return of roughly 10%. His investments since that time, however, netted him an average annual return of around 16.5-17.5% through 2023 (note: the average UK inflation across this period was approximately 5.1%). Sounds pretty good already, but it gets better.
Here’s what I mean. If I managed a 10% return on a £10,000 investment over a 30-year period, the compound interest would have built up to £174,494. Not bad.
But if I take that £10,0000 and give it a 20% return over 30 years, it snowballs into a gargantuan £2,373,763. That’s over 13 times the amount of money.
Such returns from stocks are how he became the richest man in the world, and it’s why his advice is so valuable for anyone who wants to build wealth by holding shares in companies.
How he invests
“The money is made by investing in good companies for long periods of time.”
That’s a quote from Buffett that explains his philosophy. Basically, invest in a few excellent companies and hold for the long term. He does this himself, with 75% of his company Berkshire Hathaway’s portfolio made up of only five companies.
One of these is drinks manufacturer Coca-Cola, a stock that has returned 10,749% over the last 40 years. That’s a 107-times return! This really shows the power of investing in the right company. Anyone who held £10,000 in Coca-Cola along with Warren Buffett back in 1983 has seen their stake mushroom into £1,070,000.
As for me, I’d look to build my portfolio with companies on the FTSE 100. British firms are cheap by historical standards right now, so it’s an excellent time to get in.
How stocks can build wealth
The retirement age when I’m older looks like it will be 68, so that gives me 32 years of compounding. And the average return on the FTSE 100 is 8% going back to its inception.
Let’s say I can save £300 a month. If I managed the 8% average return, that would accumulate into a total of £500,639 by the time I was 68. That’s a nice figure, yet is it ‘wealth’? I’m not sure, but it could offer me financial security or an additional income source.
But what if I could take Buffett’s advice and achieve a higher return? At 12% a month, my £300 a month would balloon into £1,156,579 when I’m 68. That’s a terrific amount of money and could give me a sizeable extra income in retirement, or even open a path to retiring earlier.
Inflation would mean those figures would be worth less in the future. And I could end up with lower or even negative returns. What’s more, Buffett’s expertise and experience means that the average UK investor may find it more difficult to identify the kinds of stocks he would have invested in, of course.
Still, as a framework for using stocks to achieve real wealth even if I had no savings at 36 or any other age? I like Buffett’s advice a lot.
