Warren Buffett’s career is proof that generating high returns on the stock market is an achievable goal. Certainly, not all investors will be quite as successful as the ‘Sage of Omaha’. After all, he has become one of the richest people in the world with a track record that includes consistent outperformance of the wider stock market.
However, following Buffett’s tips and advice could be an excellent starting point for any investor who wishes to improve their retirement prospects.
In fact, there is one specific tip from Warren Buffett that could help you more than any other piece of advice he has given. That is to hold on to your best investments for an exceptionally long time, rather than taking profits over a shorter period.
Although not all investors may naturally wish to hold their stocks for many decades, doing so could provide them with an improving rate of capital growth. A key reason for this is that it can take a long period of time for a company’s competitive advantage to translate into a strong share price performance.
For example, a business may have a lower cost base than its rivals that requires an unusually deep recession to strengthen its competitive position. Or, it may take time for the brand loyalty that a business enjoys to lead to a growing market share and improving levels of profitability.
Whatever the reason, the business world still moves at a relatively modest pace. Information, news and the stock market may be moving faster than ever. But since investors buy shares in real businesses, it can pay for them to focus on the prospects for a company over decades, rather than years (and especially months).
A brief glance at a chart of the long-term performance of the stock market shows that it generally moves upwards. Certainly, there are bear markets and periods of intense volatility that cause investors to experience paper losses. But buying a diverse range of stocks and simply holding them for a period of decades is very likely to yield a high return.
With this in mind, unearthing the best opportunities that the stock market offers at a specific point in time, buying them and allowing the growth potential of the world economy to catalyse your portfolio could be a sound idea. While it may be exciting to buy and sell shares regularly in order to apportion your capital more efficiently, sitting back and allowing the world’s economic growth to drive the stock market, and your portfolio, higher could be a better idea.
Not only does it mean less effort on your part, it allows compounding to boost overall returns. This can take many years to have a noticeable impact on your portfolio, but over the long run it can make a large difference to your pension portfolio. As such, following Buffett’s advice in terms of ‘buying and holding forever’ could be the simplest and easiest means of improving your retirement prospects.
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Views expressed on the companies mentioned in this article are those of the writer 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 diverse range of insights makes us better investors.