While a lot of people fantasise about retiring early, not many take proactive steps that might help them achieve that goal. I think it’s possible to increase the chances of retiring early in a number of ways. One simple way is simply to apply some of the habits of investor Warren Buffett. Here’s how I think some straightforward Warren Buffett habits could help me accrue a larger pension portfolio and retire at least a couple of years earlier.
Start, don’t wait
Buffett began investing when he was in school. Indeed, from a paper round and other activities he amassed a sum of money that would be a lot for most schoolboys even today.
There’s a lot to be said for an early start in investing. That’s because of the power of compounding. A good investment can be turned into a great investment simply by holding it longer. Think about companies like Amazon, Google, and Buffett’s long-term holding Coca-Cola. Holding them for a few years from their flotation would have been rewarding. But holding them for a decade brought far greater returns. That extra seven years isn’t long in the context of retirement planning.
A longer holding period is partly about choosing high-quality shares and holding them for a long period, rather than jumping in and out of shares frequently in an attempt to time the market. But it is also about starting saving for one’s retirement as soon as possible rather than waiting until it gets nearer. If one is already saving for retirement, it can be about increasing the size of those contributions now rather than having a vague plan to do it at some point in the future when one has more spare cash.
Ignore the temptations
The reason many people’s retirement plans don’t work out well is because they get derailed by investments they don’t fully understand. Instead of focussing on solid but boring companies, they take speculative punts on shares they hope will produce spectacular returns. Sometimes that may work out, but it’s more like gambling than investing.
Let’s say I could avoid even one major mistake in my retirement portfolio by emulating Warren Buffett’s approach. In itself, avoiding one big error could improve the chances of building a bigger retirement pot sooner. Buffett is crystal clear on this point: he doesn’t invest in industries he doesn’t understand. He doesn’t invest in companies in whose finances he sees sizeable red flags. He focusses on large companies with proven business models.
No doubt, at times Warren Buffett has been tempted by esoteric investments along with the rest of us. Having the discipline to avoid them has improved his investment returns. I think it can do the same for my retirement portfolio.
Do less, but on a big scale
Warren Buffett is also pretty scathing when it comes to jumping in and out of markets frequently. That isn’t just because of the increased trading costs and risk of being out of the market during a sharp move upwards. It’s also because Buffett thinks that making only a few investment decisions in one’s lifetime leads to a higher quality of decision-making.
Buffett reportedly tells students, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it, so that you had 20 punches — representing all the investments that you got to make in a lifetime. And once you’d punch(ed) through the card, you couldn’t make any more investments at all”.
The corollary of this approach is that, when Buffett finds an investment he likes, he’s happy to go into it in a big way. Apple is an example – Buffett has spent over $30bn on Apple stock making it by far his biggest shareholding. If I focus on just a few well-researched, high-quality opportunities and put in a substantial amount of my retirement pot, the improved returns, compared to investing in dozens of middling opportunities, could be substantial over time. That said, even the best companies can stumble. So while I’d consider putting substantial amounts into carefully picked shares, I would always make sure my portfolio remained diversified across different companies and industries.
Valuing dividends
Buffett doesn’t obsess about dividends. Just because a company doesn’t pay dividends, it doesn’t necessarily mean he would avoid it. But he clearly values dividends – and with the compounding effect seen above, I understand why.
I think that’s particularly important when it comes to long-term planning for retirement. Let’s say I have 30 years in which to prepare for retirement. Imagine I decided to invest some of my retirement portfolio in supermarkets. If I put £1,000 in Tesco today and it maintains its current dividend yield of 3.26%, after 30 years of reinvesting dividends I would have accrued £1,618 of dividends. Meanwhile, Sainsbury is yielding 3.59% at the moment. Now, that might sound very similar to Tesco. But to earn the same amount of dividends (£1,618) I would only need to wait 28 years with £1,000 in Sainsbury, not Tesco. In other words, that small difference in dividend could help me achieve the same result two years earlier.
That’s a theoretical example. The dividends of both companies could move around wildly in the coming 30 years, after all. The share prices could also form a sizeable part of their overall 30-year return, positive or negative. But it underlines that when it comes to compounding investments for my retirement, even seemingly minor differences in dividends could end up helping me get to the same point financially a couple of years sooner.
Read more
One of the things Buffett spends a lot of time doing is reading. Not only is he reading about existing and potential investments, he also reads to develop and evolve a wider conceptual framework within which to shape his thinking about investing.
I think that alone could help me retire years earlier. There is a world of difference between getting lucky by choosing a few shares without knowing much about them and having a disciplined investment approach based on a substantial understanding of what to look for when selecting shares.
Retiring two years early
The dividend example shows how even apparently minor differences can take a couple of years off the time it takes me to achieve an investment objective.
I think that’s true more generally: following these Warren Buffett tips should help me plan better, make higher quality investments and avoid some costly mistakes. That should help increase the value of my retirement portfolio compared to not emulating Buffett’s approach. If those superior returns do indeed transpire, that could help me reach my investment goals and retire a couple of years sooner than I otherwise would.
