Warren Buffett Warns About This Expensive Investment Strategy
Legendary investor and chairman of Berkshire Hathaway Warren Buffett has given a lot of investment advice over the years. One of the most common and potentially costly mistakes investors warn against is letting emotions drive their investment decisions.
This mistake can hurt any investor, but it is especially dangerous for those in or near retirement.
Don’t let fear control your decisions
It’s easy to fear losing money during a pullback in the market, or to fear missing out when the stock goes up. But pulling your money aside or chasing speculative investment options can do serious damage to your long-term financial goals. You can run the risk of being locked into a loss or pouring money into investments that don’t have solid foundations and end up falling apart.
To be clear, there are ways to use market volatility. One of Buffett’s most famous pieces of advice is to be greedy when others are fearful, or fold when others are moving. But it’s important to be strategic and consider your goals, risk tolerance and time horizon. For example, you can limit yourself to investing a certain amount of money only when stocks fall below a certain limit, or sell a certain amount when a stock rises and your portfolio becomes overexposed.
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Why this is especially detrimental to investors over the age of 50
If you sell during a correction, you miss out on rebounds. But while someone in their 20s has time to recover from a loss, people in their 50s don’t have as long of a time horizon.
If you’re nearing retirement, you’ve probably been saving for years and watching your portfolio grow. If you have $1 million or more saved for retirement, you may have more risk and less time to return than a younger investor with a smaller portfolio. That kind of loss can force some people to work a few more years or change their lifestyle in retirement.
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What did Buffett do instead
Buffett is a proponent of long-term investing. He recommends finding strong, long-term companies with stocks you can be comfortable holding for years — not flashy stocks that might just be a fad.
He also recommends investing in cheap indexes that provide broad diversification instead of putting all your eggs in one basket.
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A smart way for investors nearing retirement
Investing for long-term goals like retirement requires balance. While fear may compel you to put your money aside, the excitement of seeing a stock soar may pressure you to rush back out of work.
Don’t overdo it. You can gradually change your asset allocation as you age, retirement becomes accessible and your risk tolerance changes. Rebalancing into lower-risk assets and holding some of your growth-oriented investments instead of panic selling is a strong strategy for many investors. You can also sell certain investments during market rallies – a technique called rebalancing – to ensure that your strategic asset allocation is still intact.
People approaching retirement can have a separate income strategy that focuses on stocks and bonds. Financial advisors also recommend building a cash buffer that can cover at least one to two years of your living expenses, so that you are not forced to sell stocks during the adjustment period to meet your needs.
