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I’d follow Warren Buffett’s tips to retire on a growing passive income

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Mirroring Warren Buffett’s insistence on purchasing high-quality companies could allow an investor to generate a larger passive income in retirement. Such companies may offer more impressive profit growth and higher returns than their peers in the long run.

Furthermore, adopting the billionaire investor’s long-term focus may mean compounding has a longer timeframe through which to positively impact on the value of a retirement portfolio.

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Meanwhile, Warren Buffett’s insistence on having cash savings at all times may mean it’s easier to purchase undervalued shares in a stock market crash. This could have a positive impact on an investor’s retirement prospects.

Warren Buffett’s focus on high-quality companies

Warren Buffett has always sought to purchase high-quality companies that can go on to deliver impressive profit growth over the long run. His main focus has been on acquiring businesses that have wide economic moats, or competitive advantages, over their peers. For example, they may include businesses with a unique product or a large amount of customer loyalty. And that means they can enjoy higher margins.

High-quality companies may experience a higher rate of profit growth over the long run. As such, this may mean they command higher valuations that increase the size of a retirement portfolio. A larger portfolio may make it easier to generate a growing passive income in retirement.

A long-term focus on cheap stocks

Of course, Warren Buffett has also aimed to purchase high-quality companies when they trade at low prices. This provides a wide margin of safety that can mean strong capital appreciation prospects.

However, in many cases, it’s taken his holdings a number of years to deliver on their potential. In fact, some of his holdings have experienced significant disappointments along the way, or have been negatively impacted by weak investor sentiment at times.

Warren Buffett has often provided such companies with sufficient time to deliver on their potential. In doing so, he’s focused on the quality of the business and largely ignored how the share price is performing. A company’s share price usually follows its bottom line higher. So this strategy could lead to impressive returns over the long term that encourage an investor’s retirement portfolio to grow in size.

Holding cash – but not for a passive income

Warren Buffett has always held relatively large amounts of cash. Clearly, the returns on cash are unlikely to encourage a larger retirement portfolio that can offer a more attractive passive income.

However, holding cash provides the opportunity to react quickly to buying opportunities across the stock market. For example, purchasing shares at low prices following a bear market can provide greater scope for capital growth over the long run. And, as the 2020 stock market crash showed, opportunities to do so can be short-lived.

Therefore, having some cash on hand at all times may ultimately lead to a higher retirement portfolio valuation that can produce a more attractive passive income in older age.  

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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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