While having some emergency cash available for unexpected events is a good idea, relying on savings to improve your financial future may lead to disappointment. The income returns on cash savings are relatively low at the present time, and could continue to provide a lacklustre return when compared to inflation.
As such, investing in the stock market could be a better idea when it comes to enhancing your long-term financial prospects. By following the tips of one of the world’s most successful investors, Warren Buffett, you may be able to generate impressive returns from your stock market investments in the coming years.
The stock market is highly volatile in the short run. Therefore, seeking to continually buy and sell companies in a short space of time can be highly challenging. There are a wide range of variables which affect stock prices in the short term, which means that consistently generating a profit can be tough.
As such, following the lead of Warren Buffett and investing for the long term could be a better idea. He has held many of his most profitable investments for decades. This not only allows those companies to deliver on their growth strategy, it also means that compounding has an extended period of time to boost your overall returns.
A buy-and-hold strategy also means less money is paid out in commission costs. Over the long run, even modest trading costs can add up to negatively impact on your returns.
Warren Buffett has always sought to purchase companies that have economic moats. This is essentially a competitive advantage which helps to shield them from difficult operating conditions, and also provides an opportunity for them to generate higher returns than their sector peers during economic booms.
Identifying companies which have an economic moat is not an exact science. However, by considering factors such as the cost base of a business, the uniqueness of its product and the degree of customer loyalty it enjoys, it may be possible to build a portfolio of relatively attractive businesses. This could improve your risk/reward ratio and lead to higher returns in the long run.
Buying companies which have wide economic moats means that you may end up paying a premium price. Warren Buffett accepts this, and focuses on paying a fair price rather than a low price. In other words, if a stock has a wide economic moat and is trading on a valuation which is not excessive, it could prove to be a sound purchase.
Certainly, cheap shares can be tempting at times. But through focusing on price and quality, it may be possible to generate high returns which ultimately improve your long-term financial situation at a much faster pace than cash savings.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.