While winning millions on The National Lottery is an enticing prospect, the reality is that most people will not experience that result. The odds of winning The National Lottery are 1 in 45m, which is clearly exceptionally low.
As such, it may be prudent to instead focus on another means of building a nest egg for retirement. One investor who has been able to successfully achieve that many times over is Warren Buffett. He is one of the richest people in the world, with his relatively easy strategy simple for anyone to follow. As a result, it could be worthwhile adopting, since it has the potential to increase an individual’s net worth throughout their lifetime.
Prudence Perhaps the most surprising aspect of Buffett’s success is that it has built on simple techniques which anyone can implement. One of these is his approach to spending. Despite having amassed a fortune during his lifetime, the ‘Sage of Omaha’ still lives in the same house which he bought decades ago. He also drives a modest car and seeks to save money wherever possible.
One example of Buffett’s continued focus on saving money occurred when he took Microsoft (NASDAQ:MSFT) co-founder Bill Gates to lunch at McDonald’s (NYSE:MCD). Buffett offered to pay for Gates’ lunch, and proceeded to use coupons to do so. This attitude to saving money is clearly part of the fabric of Buffett’s character and any individual can seek to match this through only spending what they need to on a variety of items.
Investing With the money that has been saved through prudent spending habits, it’s possible for an individual to invest to a greater extent in the stock market. While other assets, such as property, may hold appeal for some individuals, Buffett has largely focused on the stock market when it comes to generating wealth.
Given the performance of shares in previous years, it’s not difficult to see why Buffett has focused on the stock market. The S&P 500 has delivered an annualised total return of around 7% during the last two decades. The FTSE 250, meanwhile, has recorded an annualised total return of around 9% in the same time period. With online sharedealing making the stock market accessible to a greater range of investors, it is possible for almost anyone to benefit from the growth opportunity which the stock market offers.
Reinvestment While it may be tempting to spend the profits earned on investments in shares, or the dividends they provide, Buffett has always reinvested his returns. Doing so may not make a significant difference to an individual’s net worth in the short run. But over the long run, the impact of compounding can act as a major catalyst on portfolio returns.
Clearly, Buffett has benefitted from shrewd stock selection over the years. But the foundation of his success has been a prudent attitude to spending, investing continuously in the stock market, and then reinvesting his profits. Following this approach, rather than hoping to win the lottery, could be a better means of retiring with a sizeable nest egg.
Teresa Kersten, an employee of LinkedIn (NYSE:LNKD), a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK owns shares of Microsoft. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019