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Warren Buffett has famously doubled the US stock market average of 10% across many decades. I want to see how long it would take me to generate £100k in passive income by achieving half his return.
Commitment and consistency
The first thing to note is that the sooner I start investing, the larger my final portfolio value will be.
Billionaire Warren Buffett began his investing journey as a small boy and is now in his 90s. I was still climbing trees at the age Buffett was researching stocks!
Starting from scratch, it’d take me just under 38 years investing £550 a month to reach £2.5m. This figure is important because it means I could expect an annual 4% retirement dividend yield, totalling just over £100,000.
Considerations
My strategy would require me to reinvest all my dividends. It would also need me to keep a cool head as I ride out multiple bear markets, crashes, and panics, as well as sustained bull runs (though they’re much more fun!).
History teaches that the stock market eventually recovers from setbacks and powers higher. So I’d need to trust in the process and keep committing money like clockwork each month, even when things get scary.
As Buffett said, “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful“.
It’s also worth remembering that my 10% average return is just that — an average. It doesn’t mean the market goes up by that amount every year. Far from it, as we can see from these real-life S&P 500 returns.
S&P 500 annual return with dividends
| Year | |
|---|---|
| 2023 | +26.3% |
| 2022 | -18% |
| 2021 | +28.5% |
| 2020 | +18% |
| 2019 | +31.2% |
| 2008 | -36.5% |
| 2003 | +28.4% |
| 2002 | -22% |
Picking stocks
So, I’ve started with the right long-term mindset and I have my end goal. Now I just need the bit in the middle, which is the investment vehicles to take me there.
One S&P 500 stock in my portfolio that I have high hopes for is Airbnb (NASDAQ: ABNB). That’s despite shares of the holiday rental disruptor falling by a disappointing 21% over the past six months.
Investors are worried about slowing revenue growth, which in Q3 is set to be 8%-10%, down from 11% in Q2. Also, its $21.6bn in cash (including $10.3bn held on behalf of hosts) will generate less interest income as rates fall.
Nevertheless, there are a number of things I like about Airbnb. First, as an asset-light business, it generates a tidal wave of free cash flow (FCF). In fact, its trailing 12-month FCF margin is a whopping 41%.
Second, Airbnb’s brand power is such that it’s a verb. This points to its strong mindshare among travelers. In the second quarter, it had over 8m listings globally on the platform.
Finally, I like that founder-CEO Brain Chesky is still super ambitious. He recently said, “We’re going to take the Airbnb model, and we’re going to bring it to a lot of different categories….Eventually, we do think there’s a path here to be doing more than just travel“. I like to back ambitious founder-led firms in my portfolio.
To be clear, I’ll prioritise income through steady dividend stocks when my portfolio reaches its 38th year. For now, though, I think growth stocks like Airbnb can help propel me toward that £2.5m goal.
