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Stock market rally: I’d listen to Warren Buffett and invest money in an ISA to retire rich

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Warren Buffett has a long track record of benefiting from investing money in shares. Looking ahead, he could capitalise on a likely long-term stock market rally after the 2020 stock market crash.

Therefore, following his lead and investing money in shares could be a shrewd move. It may enable an investor to improve their prospects of retiring with a surprisingly large ISA nest egg from which a passive income can be drawn.

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Warren Buffett’s long-term focus when investing

Warren Buffett has an extremely long time horizon when investing money in shares. In fact, his favoured holding period is apparently “forever“. This tallies with his track record of investing, with many of his current holdings having been part of his portfolio for many decades.

Following a similar approach could be beneficial to ISA investors. It could mean that they benefit from a long-term stock market rally of the type that has always previously taken place following a stock market crash. Certainly, the 2020 market decline may not yet be over. The economic outlook is weak, while political change could mean that investors become more risk averse in the coming months. Therefore, a long-term approach may prove to be more profitable than seeking to benefit from short-term share price movements.

The impact of compounding on an ISA portfolio

Warren Buffett’s long-term outlook allows him to benefit from compounding. Over time, this can make a huge difference to the size of an ISA portfolio. For example, £10,000 invested at a 10% return over five years would be worth just over £16,000. However, the same return over a period of 25 years would turn a £10,000 investment into a portfolio valued at £108,000.

Many investors who are investing money for retirement are likely to have a long time horizon. Therefore, they may be better off using the 2020 stock market crash to their advantage, in terms of buying high-quality shares at cheap prices. Over time, they could benefit from a likely stock market recovery that boosts the value of their ISA to a surprisingly large amount.

The benefits of using an ISA

While Warren Buffett remains invested in shares for the long run, investors may require access to their portfolios due to unforeseen events. For example, they may encounter financial difficulties, or have housing/car repair bills to pay. This could mean that locking away their capital for decades may not be an attractive option.

ISAs provide far greater flexibility than other retirement accounts. They can be accessed at any time without penalty. Withdrawals from an ISA are also tax-free. As such, since they offer attractive tax benefits at a low cost, using them to invest money in shares for the long term could be a sound means of capitalising on a likely stock market rally.

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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.

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