While the State Pension can help to pay for your day-to-day expenses in retirement, it is unlikely to be sufficient on its own to offer financial freedom in older age. It amounts to just £8,767 per annum, which is significantly below the average UK income.
As such, building a retirement portfolio and generating a passive income from it could prove to be crucial for many people. This may sound like an impossible task – especially with there being numerous risks facing the world economy at the present time.
However, by following Warren Buffett’s advice on when to buy shares it may be possible for you to boost your returns and generate a sizeable nest egg for retirement.
Buying on fear
For most investors, the logical time to buy shares may seem to be during a period when the growth prospects for the wider economy are sound. After all, company shares usually rise when they deliver strong earnings growth, and economic strength is more likely to produce growth than a recession.
However, at such times, stock prices may include investor expectations that a business will deliver improved performance. This may mean that much of their valuation includes a premium for expected growth, which could raise their share price and create less scope for an investor to generate capital growth.
As such, investors such as Warren Buffett aim to buy when other investors are cautious about the prospects for a specific stock, industry or even the wider economy. This can mean that the premium which would be included in a company’s stock price due to growth expectations among investors becomes a discount that equates to a more favourable risk/reward ratio.
The long-term impact of this strategy can be higher returns – as evidenced by Warren Buffett’s success over a period of many decades.
Although the world economy is currently experiencing a ‘boom’ period, investors are cautious about its prospects. A variety of risks such as a global trade war, Brexit and geopolitical uncertainty across many regions in the world could derail its progress in 2020 and beyond.
Therefore, many FTSE 100 and FTSE 250 shares appear to trade at discounts to their intrinsic values. This could mean that investors are able to buy high-quality businesses at low prices, thereby improving their chances of generating high returns in the long run.
Certainly, there may be a period of volatility in the short run that leads to paper losses. But most people who invest for their retirement have a long-term horizon that affords them the time required for their holdings to post a recovery following a period of disappointing performance.
Investors who are seeking to build a nest egg for retirement so they are less reliant on the State Pension may wish to invest in a diverse range of stocks today. Over the long run, their present-day valuations could support above-average total returns that improves your retirement outlook.
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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.