While having cash savings can be a good idea, relying on them to build a retirement nest egg may lead to a significant amount of disappointment in the long run. The returns on cash are unlikely to improve your retirement prospects, and are even less likely to help you in generating a seven-figure portfolio.
As such, adopting a value investing strategy such as that followed by Warren Buffett could be a sound move. By focusing on undervalued shares which have wide economic moats and investing for the long term, you could increase your chances of making a million.
Investing versus saving
As mentioned, having some cash savings can be a worthwhile move. Since cash is highly liquid and easy to access, it can be used to pay for unexpected costs such as car repairs. Furthermore, having cash available can provide peace of mind. Warren Buffett, for example, holds cash to guard against the uncertain nature of the stock market and wider economy.
However, having too much cash can cause potential problems. At the present time, for example, interest rates are relatively low. This means that the returns on cash may not be substantially ahead of inflation, and could therefore fail to increase the value of your retirement portfolio in real terms over the long run.
By contrast, the stock market has a strong track record of delivering high returns. Certainly, it has experienced bear markets and downturns. But, it has always recovered from them to post annualised total returns in the high-single digits. As such, it appears to be a superior means of maximising the returns on your capital in the long run.
In addition to focusing your capital on the stock market, adopting a value investing strategy could increase your chances of making a million. Warren Buffett’s focus on undervalued shares with wide economic moats has helped him to unearth highly attractive investing opportunities. The same principles he uses in this regard could aid you in your retirement plans.
For example, buying shares in companies that have a clear competitive advantage versus their peers could lead to superior returns in bull markets, as well as defensive characteristics in bear markets.
Such companies may enjoy lower costs than their rivals, or stronger brand loyalty, which can lead to them delivering higher returns in the long run. Buying them while they trade at a discount to their intrinsic value may further enhance their scope for capital growth, since they may offer a favourable risk/reward ratio.
With a number of stocks appearing to have wide economic moats and low valuations at the present time, now may be the right time to invest your capital in the stock market.
Through adopting a long-term focus and using a value investing strategy, you can generate higher returns than those available from cash savings accounts. In doing so, your retirement nest egg may have a higher chance of being valued at over a million.
The post Don’t save for retirement! Follow Warren Buffett’s tips to make a million appeared first on The Motley Fool UK.
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