[ad_1]
Image source: The Motley Fool
Warren Buffett bought his first stock at age 11. Unfortunately, I didn’t start investing until later in life. But, what difference would it make if I followed the advice of a great American investor, when I was young?
Words of wisdom
I got my first job when I was 17. Now I’m almost 50, which means I’ve been able to invest for 33 years.
That’s the first suggestion, start early.
Second, take a long-term approach.
Many of Buffett’s quotes emphasize the need to invest for the long term. “If you don’t think about owning a stock for 10 years, don’t think about owning a stock for 10 minutes.“, he once said.
Buffett’s third piece of advice is to invest in a tracker fund. He believes that over a long period of time, this will produce returns that private investors would expect.
As the name suggests, this investment product will track a specific index or group of stocks. This has the advantage of providing a diversified portfolio, without having to own all the stocks individually.
Some investors don’t like these funds because they like to pick stocks, and get the thrill of buying and selling. However, if you don’t want to be actively involved in day-to-day investment management, then tracker funds are ideal.
As an American, Buffett believes that S&P 500 the best index to follow. On this side of the Atlantic, it’s the same FTSE 100.
Let’s crunch the numbers…
A simple example can help illustrate why Buffett is right.
My first job, working every weekend in a local DIY shop, paid £1.50 an hour. Even on a modest salary, I’m sure I could find £25 to invest every month.
according to IGthe average annual growth rate of the FTSE 100 from 1984 to 2019, is 5.8%.
Buffett also believes in re-investing any dividends received. This is an effective way to increase your regular investment. A reasonable estimate of the historical dividend yield, for the UK’s largest listed companies, is 3.5%.
Based on that assumption, after 33 years, I now have almost £66,000. That’s not bad for a cash outlay of £11,400!
| Time scale (years) | Investment value (£) |
| 1 | 329 |
| 2 | 688 |
| 3 | 1,082 |
| 4 | 1,513 |
| 5 | 1,986 |
| 10 | 5,112 |
| 15 | 10,035 |
| 20 | 17,786 |
| 25 | 29,989 |
| 30 | 49,201 |
| 33 | 65,686 |
Even if it ignores the impact of inflation, brokerage fees, and stamp duty, this is a powerful illustration of the benefits that can be gained from prudent long-term retirement planning.
However, Warren Buffett is 92 and still investing. If my table were extended for another 42 years, it would show a cap value of over £665k!
Lesson learned
My example shows the power of compounding. By investing small amounts over a long period of time and reinvesting the dividends received, you can build significant wealth.
Of course, there are no guarantees. The past is not always a good guide to the future.
However, I wish I had spent less time reading Shakespeare when I was studying for my A-Levels in English Literature and more time studying Buffett.
Maybe it’s time to put the lesson of American investors in the school curriculum?
[ad_2]
Source link