No Savings at 40? Warren Buffett’s Method Could Help You Get Rich

It’s never too late to begin investing. Here’s how you can use Warren Buffett’s advice to build a nest egg.

| More on:
financial freedom sign

Image source: Getty Images

If you’re a bit late to the investment game, don’t worry. Assuming you’re planning on retiring at 65 like most Canadians, you still have a runway of 25 years to work with. By making consistent contributions, selecting diversified investments and staying the course, you could still create a six-figure portfolio.

Today, I have some great advice and strategies for middle-aged investors from the “Oracle of Omaha,” Warren Buffett, himself. Buffett is one of the most successful value investors in history, having made his fortune buying the stocks of downtrodden large-cap U.S. companies.

Despite being a successful stock picker, Buffett is actually a fan of index investing and suggests a simple, but highly effective strategy using exchange-traded funds (ETFs) for the average retail investor. Want to know his method? Keep reading to find out.

The Warren Buffett strategy

In 2013, Buffett penned a letter to Berkshire Hathaway shareholders where he explained his rationale for how he wanted his estate to be invested upon his passing. Now, most people would think that Buffett might have left some key stock picks, but the opposite is true.

Instead, Buffett instructed his trustee to invest 90% of his estate in a low-cost S&P 500 Index fund, and the other 10% in short-term U.S. treasury bonds. This portfolio has since become known as the “Buffett 90/10,” and it turned out to be a highly effective strategy for long-term investors.

Canadians can implement this in their Registered Retirement Savings Plan using U.S.-listed ETFs to save on the 15% foreign withholding tax on dividends. The best funds to use here in my opinion are Vanguard S&P 500 Index ETF (NYSEMKT:VOO) and Vanguard Short-Term Treasury Index Fund ETF (NASDAQ:VGSH).

Both of these ETFs are extremely cheap, with expense ratios ranging from 0.03% to 0.04%. For a $10,000 investment, this means around $3-$4 in annual fees. To create this portfolio, simply buy 90% VOO and 10% VGSH and re-balance them annually. Hold for 25 years and reap the results!

Historical performance

Note: the backtest results provided below are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Hypothetical returns do not reflect trading costs, transaction fees, or actual taxes due on investment returns.

Let’s assume you started investing in 1997 as a 40-year-old with just $10,000 to start your portfolio with. You put it into a 90/10 mix of VOO and VGSH and stuck to contributing $500 monthly (or $6,000 annually as per the Tax-Free Savings Account contribution limits) and held for 25 years until 2022.

Despite losses during the 2000 Dot-Com Bubble, the 2008 Great Financial Crisis, the 2020 Covid-19 Crash, and the 2022 Bear Market, sticking to this strategy would have turned your initial $10,000 investment into a cool $671,207, which is more than enough for a comfortable retirement.

All you did was hold two low-cost index ETFs for 25 years, consistently contribute $500 a month, and stayed the course, which meant not timing the market or panic-selling. Buffett’s strategy hinges on keeping fees low, diversification high, and good investment behaviours. Consider giving it a try!

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.

Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

funds, money, nest egg
Stocks for Beginners

$10,000 Invested in These Stocks Could Make You a Fortune Over the Next 10 Years

Are you looking to make a fortune? Then you have to give time in the market. Here are a few…

Read more »

Happy shoppers look at a cellphone.
Stocks for Beginners

The TSX Is Down, But These 3 Stocks Are Beating the Market

These three stocks continue to not just outpace the TSX today but soar past it. Plus, they provide protection both…

Read more »

stock market
Stocks for Beginners

Safer Than Gold: 3 Ways to Protect the Downside of Your Portfolio

You can protect the downside of your portfolio by planning ahead with low-risk (potentially dividend) holdings.

Read more »

worry concern
Stocks for Beginners

Better Buy: Shopify vs. Constellation Software Stock

Shopify (TSX:SHOP) and Constellation Software (TSX:CSU) stocks are looking incredibly cheap amid the 2022 bear market.

Read more »

a person searches for information on the internet
Stocks for Beginners

5 Things to Know About Nutrien Stock in November 2022

Should you buy NTR stock?

Read more »

Money growing in soil , Business success concept.
Stocks for Beginners

Investing in the Stock Market Could Turn Your $10,000 Into $100,000: Here’s How

Do you want to earn $100,000 from stock market investing? Here are three simple rules to earn 10-fold returns on…

Read more »

Arrowings ascending on a chalkboard
Stocks for Beginners

3 Top Canadian Stocks to Buy Now Before They Rally

Are you looking for cheap Canadian stocks to buy before the next big rally? Her are three top stocks that…

Read more »

Businessman looking at a red arrow crashing through the floor
Dividend Stocks

2 Bargain TSX Stocks Trading Near Their 52-Week Lows

Buy when others are selling. It’s time to act and buy two bargain stocks trading near their 52-week lows after…

Read more »