Starting an investment journey from scratch can be a daunting process, but by following in the footsteps of legends like Warren Buffett, investors can position themselves for greater success. The same applies to those starting in their 30s or 40s. After all, Buffett made 99% of his wealth after turning 50.
So how exactly should investors go about getting the ball rolling? Let’s explore.
1. Eliminate high-interest debt
The stock market is a powerful wealth-building tool. There have been multiple years of explosive growth this past decade. But on average, UK shares tend to climb by around 8-10% a year. Why does this matter?
A critical concept to understand when building wealth is capital allocation. Investors need to determine where’s the best place to inject money to maximise the benefits. And the answer isn’t always stocks. It could actually be to pay off existing obligations rather than buying assets.
Suppose someone has racked up a chunky amount of credit card debt that’s charging close to a 25% interest rate? Replicating such gains in the stock market is exceptionally difficult to do on a consistent basis. For reference, Buffett’s average is 19.8%.
Even if an investor were able to replicate Buffett-like returns, that’s still 5.2% behind the interest incurred on the credit card. As such, even with a terrific portfolio gain, wealth is actually being destroyed. Therefore, investors are likely to be far better off wiping out any outstanding and expensive debts before starting a stock market portfolio.
2. Invest consistently
Assuming an investor has gotten their finances in order, it’s time to start putting money to work. Buying shares in an index fund is a fantastic beginner-friendly way to capitalise on the benefits of the stock market. However, for those seeking chunkier returns at the cost of additional risk, picking individual stocks is a more appropriate course of action – something that our Share Advisor premium service is designed for.
Regardless of the selected approach, investors need to get into the habit of investing consistently, even if it’s just £100. A small monthly sum may seem like a fruitless effort in the short term. But when compounded over decades, regular tiny contributions can add up considerably.
To demonstrate, putting aside £100 a month for 10 years equates to £12,000 in savings. But when earning an average annualised return of 8% over the same period, a portfolio reaches £18,295 in value – a 52.5% increase in wealth.
3. Don’t ignore risk
As many investors have recently been reminded, the stock market can be a volatile place. Not every business ends up succeeding. And even the ones that do can still suffer massive declines in stock price should investor pessimism start spiking.
Tactics like pound-cost averaging and diversification can help mitigate some of this risk. But it can’t be completely eliminated. That’s why it’s crucial to try and always make sensible and informed investment decisions to avoid falling into traps. Even if that means potentially missing out on lucrative opportunities.
Every investor will eventually make a mistake. Even Buffett is guilty of that. But by taking a disciplined approach, the impact can be minimised, and a portfolio can be steered back on course over time.
