I Earned £100k in Passive Income in My 20s Following Warren Buffett’s Advice

“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.” — Warren Buffett

Financial education is a huge, gaping hole in our traditional education systems. Most young graduates leave formal education with no idea about how to manage their finances.

Yet, as a result of that very education, they will now be paying off the debt that financed their shiny degrees for the next 5, 10, or more years. And the fees are only rising, leading to higher and higher debt levels.

This lack of financial understanding isn’t limited to young folk — most of us just don’t know how and where to manage our finances and miss out on the opportunities to maximize our earning potential.

One of the most-hidden secrets that they don’t teach you at school is the concept of passive wealth.

You may be afraid to dip your toes into the water due to the misinformation and fearmongering headlines out there. Yes, there is risk involved — like anything worth doing in life. But does that mean you should stay out? No. You need to be in and stay in over the long term. The earlier you start, the better — but better late than never.

So, how did I do it, and how can you too?

Follow these steps to start building passive wealth by investing into your portfolio the smart way.

Disclaimer: what follows does not constitute financial advice, and purely represents my own personal account. Results are never guaranteed in the stock market, and it is possible to lose more than what you put in when not invested wisely. Your portfolio composition needs to reflect your own lifestyle and personal goals — not anybody else’s.

Learning the basics

First, spend some time educating yourself about the basics of investing.

The key things you need to get familiar with are:

The 5 asset classes (shares, bonds, commodities, property and cash).

The different ways to invest in the market (buying individual stocks and shares versus buying funds).

The risk versus reward equation — the higher the stock or fund’s risk profile and volatility, the higher the potential profit (never invest more than you could afford to lose).

Diversification — avoid putting all your eggs in one basket. Funds can help you do this very quickly by letting you invest in a large number of companies (holdings), spread sectorally and geographically, in one click.

Investment goals and horizon — get clear on why you invest and at what stage of life you are at. If you are starting as a young graduate, you’ll want to invest 90 to 100% into equities and more aggressive funds (higher risk, higher reward). However, if you are nearing retirement or need to fund a big expense like a wedding or your children’s education, best to scale back to the appropriate ratio. For instance, 60% shares versus 40% bonds, which are much more stable (lower risk, lower reward due to the benefit of stability).

Being able to invest in a range of companies operating across various sectors and across the globe mitigates your overall risk. Hence the benefit of choosing to invest in funds over individual shares.

A loss in one area will likely be compensated by another sector, which is growing faster at the same time.

I found the best way to do this was to invest in funds. Examples are index trackers (merely tracking the performance of a stock index like the S&P 500 or FTSE 200) and active funds (which are managed more actively by fund managers and tend to cost more as a result but can sometimes offer higher returns).

Funds let you diversify as much as you like without having to invest into 100’s of individual stocks separately. This means you’ll save on the high transaction and management fees that switching in and out of individual stocks would cost.

It also helps to research the various providers available out there — to compare their costs (“total expense ratios”) and the funds they are offering.

For instance, note that opening up an investment or saving account with a bank tends to limit your choices. The bank will likely offer their own funds at the expense of the broader range that an independent provider can usually provide.

Staying consistent no matter what

The stock market is full of ups and downs, as investors large and small react to external events, company announcements, or whatever Elon Musk said about Tesla on Twitter.

Do not get caught up in any of this.

There are simply too many variables for you to stay on top of. This is the job of full-time investment managers.

Your job is to be consistent and stay in the game. We are not talking about speculative trading here — investing is a long-term game. And steadiness is its name.

As Warren Buffet, the investment legend himself, said: “I will tell you the secret to getting rich on Wall Street. You try to be greedy when others are fearful. And you try to be fearful when others are greedy.”

Going against the current is one way Buffett made his fortune. He didn’t let emotions get in the way of his thinking: if he chose to invest in a company for any given reason, he would stick to it because he had done his research and was confident in his choice.

The same applies to funds. If one particular fund’s performance is going down, that is not to say it won’t come back up. If the fund is properly diversified, most likely, shares of the companies in other sectors will compensate for the short-term downfall.

By investing consistently in several such funds, covering multiple sectors and geographies, you are increasing your odds of success.

When compounded over time, the idea behind consistent investing is to “smooth out” the downturns via a lifetime of steady investing. The market has always bounced back and recovered from even the worst financial crashes in history, in a cyclical fashion.

You need to be willing to ride the wave as company values rise and fall. And don’t try to “beat the market” by timing when to enter or exit the market — only a handful of seasoned professionals have ever managed to do so consecutively over the years.

And no matter what “experts” may say on TV, no one has a crystal ball to peer into the future. You never know when any stock or fund has hit rock bottom or when it is at its peak.

In his book “Unshakeable”, Tony Robbins gives the telling example of one man who had worked for UPS his entire life.

This was a working-class individual who never earned more than $14,000 in a year. He decided to save a certain percentage of his income each month (20%) and immediately invested it in funds without fail.

He didn’t try to time his investments. He didn’t interface or tinker with his portfolio. Each year, he would raise the bar as he earned more but stuck to his 20% rule.

Compounded over time, his original investment of a measly $2,800 had turned into a hefty $70 million by the time he’d retired!

This is why, as Einstein himself stated:

“Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

To be on the side of those who earn it, you need to be in the game. And stay in it for the long haul.

Automating the process

ISA and SIPP accounts in the UK (the equivalents of IRA and 401(k) accounts in the US) allow you to set up regular contributions into your portfolio.

Decide how much excess money you can put aside each month. Whatever you don't need to spend, invest. Hold the rest as cash.

The regular contribution plans let you invest that amount on a given date every month without you having to think about it.

You can then direct this cash into specific funds of your choosing or have the money sit in your cash line until you actively decide which funds to invest in.

I opted for the 2nd option, giving me some control of where I place my bets each month. This allows you to look at the latest performance of each of the funds you hold in your portfolio and make an informed decision.

However, as all disclaimers state, "past performance is no guarantee of future returns."

So, if you don't want to spend a few minutes each month looking at your portfolio or worrying about it, you are better off automating where your funds go each month. This way, your investments will run on auto-pilot.

Then, every year at the most, review your portfolio and:

a) Increase the amount you set aside and invest each month (in line with your income and salary growth).

b) Adjust your investments to "rebalance" your portfolio (this means investing in more equity-heavy funds if bonds have taken over a larger part or vice-versa, to stay in line with your investment goals).

Key takeaways

Apply these 3 keys to start a successful personal investment portfolio. This will help you build a solid foundation for you and your family's future - not something you can afford to neglect or postpone.

Regularly invest your excess cash into funds + let time do its compounding magic = financial freedom over a lifetime of investing.

By financial freedom, I mean the point whereby every penny you invest immediately returns more money in your pocket, compared to what you've put in.

While the above may not sound like a sexy "get rich quick" scheme, that is because it works. And it isn't some deluded pipe dream, which is doomed to remain one.

Some great resources to help you go deeper into the topic and get better at managing your finances are:

Demystifying Finance resources:  5 simple, short videos to take you through all you need to know to get started the right way.

Step-by-step walkthrough to build your own financial model :  to see how much you could expect to earn throughout your life.

Investing basics guide.

How to become unshakeable with your personal finances, from Tony Robbins.

And remember :  if you haven't yet begun on your investment journey, and feel like you are behind, don't let this stop you.

Because, as the Asian proverb states:

"The best time to plant a tree was 20 years ago. The second best time, is now."