Garry Kasparov is widely recognized as one of the greatest chess players in history. Think you could outwit him?
Maria Callas is often touted as one of the finest opera singers of all time. Think you could out-sing her?
Warren Buffett is known as one of the best investors this world has ever seen. Think you could outperform him?
You may not be able to checkmate Gerry Kasparov or hit notes like Maria Callas, but surprisingly, you may have the ability to produce returns superior to Warren Buffett, whose investing prowess has made him one of the richest individuals in the world.
If it seems highly improbable that you could invest better than a living legend, you would usually be correct. However, you may have access to an investment that would generate returns that would make Buffett salivate.
First, a bit of perspective.
Buffett has produced returns for his company, Berkshire Hathaway, in the neighborhood of 20% per year since the mid-1960s. That performance has placed him in rarified air. As a point of comparison, the U.S. stock market has “only” turned out returns of about 9-10% per year in that same time period.
To put that in the proper context, if you would have invested $1,000 in Berkshire Hathaway in 1965, you would be sitting on stock worth just over $9 million by the end of 2015. The corresponding dollar figure for investing in the U.S. stock market in 1965? Closer to $100,000.
Now, imagine if you could find an investment with a return better than Buffett’s 50-year average of 20%. Surprisingly, it’s quite possible that you can. If your employer offers a company retirement plan – like a 401(k) or a SIMPLE IRA – chances are you could make Buffett’s 20% return look downright puny.
Want to know how?
It’s simple. Contribute enough to max out the matching funds from your employer.
There it is. The secret to compounding your wealth like an investment pro is as simple as contributing to your company retirement plan. If that sounds like a let-down, check out the math.
Let’s say your employer offers to match your contributions dollar-for-dollar on the first 2% of your compensation, and 50 cents on the dollar for the next 2% of your compensation. So, you contribute 4% of your paycheck, and your employer adds 3% of your paycheck on top of that.
If you make $50,000 a year, that amounts to $2,000 of your own money, which is matched with $1,500 in additional money by your employer each year. In other words, you invest $2,000 and generate an immediate gain of $1,500. That’s a simple return of 75%.
That noise you hear is Warren Buffett weeping with envy.
Want to know what’s even better? When Buffett makes an investment, there is a chance that he may lose his money. The investment could be a dud, the company could go bankrupt, or any number of other negatives could impact the return he receives. Investing always involves risk.
But by contributing to your company retirement, there is virtually no risk to your incredibly high return.
In other words, you may have access to a tremendously low-risk investment that produces an incredibly high rate of return. It doesn’t get any better as an investor. That is truly the holy grail.
Now, to be fair, the 75% gain is a one-time boost. After that, your $2,000 and the $1,500 match will only grow at the rate of the investments you select. And to be realistic, you’re probably looking at gains in the 6-10% range, depending on your mix of investments, rather than Buffett’s long-term average of 20%.
But even if only for a while, it’s amazing to think you can generate returns better than the pros. The only caveat: You have to meet your employer match.
Without question, contributing to a retirement plan and receiving your company’s matching funds is one of the best investments out there. Don’t miss out. Buffett wouldn’t.