Premium Bonds have been a popular investment destination over many decades. They offer the chance to win £1m while there’s no risk of capital loss as they’re backed by the government.
However, the average returns generated by Premium Bonds are currently lower than inflation. Therefore, the vast majority of holders are likely to see the spending power of their savings gradually eroded.
By contrast, Warren Buffett’s strategy has produced consistently high returns over the long run. As such, it could be a better means of making a million than Premium Bonds.
Risk/reward
As mentioned, there is no chance of losing money on Premium Bonds. This is unlike Buffett’s value investing strategy, where experiencing paper losses on your investments is relatively commonplace.
In fact, the stock market is highly cyclical, and experiences bear markets on a regular basis. While this can cause some investors to panic and become fearful, Buffett becomes greedy during such periods. In other words, he buys shares when the near-term outlook for the company in question is relatively uncertain. In doing so, he capitalises on favourable share prices that can lead to significantly higher returns in the long run.
The cost of this strategy is the risk that a share price will fall. However, through buying stocks at discounts to their real value, Buffett reduces risk through obtaining a wide margin of safety.
Buying opportunity
Buffett’s strategy may become increasingly relevant over the coming months. At the time of writing, there’s an ongoing trade dispute between the US and China. This is causing investors to become increasingly cautious about the outlook for the stock market, with the world economy facing a period of potentially lower GDP growth.
This situation could induce a bear market, or even a world recession. However, in some cases, the risk of this taking place has been factored in to share prices. In the FTSE 100, for example, there are a number of companies that appear to offer wide margins of safety, and that trade on valuations which suggest they have the capacity to post high returns in the long run.
Through following Buffett and buying such stocks today, you may put yourself in a position to generate a £1m portfolio in the coming years.
Suitability
Of course, Buffett also keeps some of his capital in cash. This enables him to have the capacity to invest in opportunities that present themselves, as well as providing peace of mind. As such, having some Premium Bonds may be a good idea.
But focusing your capital on them over a sustained period may produce disappointing returns that could fail to keep up with inflation. By contrast, Buffett’s track record shows value investing can be a realistic path to generating a seven-figure portfolio for any investor.
