Warren Buffett’s Rule No. 1 Every Retiree Should Live By
Legendary investor Warren Buffett prefers to keep things simple when it comes to investing, and his strategy can be boiled down to one short point: don’t lose money.
That rule may sound obvious, but when faced with market volatility and popular investment options, investors are often tempted to make moves that could cause them to lose money. But avoiding risky, speculative activities and focusing on the long term can help retirees make their money last longer.
Understand risk and volatility
Risk and volatility are common aspects of investing in the stock market – but they should not be confused. A low-risk stock or bond can tolerate periods of sharp volatility, while high-risk assets can have low volatility. Stock volatility simply refers to how sharply the price moves in any direction. If a stock goes from $20 to $25 and then drops to $18 within a week, it is volatile. However, if a stock hovers between $30 and $33 throughout the year, it’s not that volatile.
Risk, on the other hand, indicates the possibility of losing the invested capital. Utility companies are considered low-risk assets as they tend to generate stable cash flows, and consumers buy utilities during all economic cycles. Unprofitable growth stocks are very risky as failure to deliver profits can eventually translate into long-term losses.
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Don’t panic sell
Investing in stocks doesn’t guarantee that you’ll make a profit every day – in fact, you’re bound to see many market declines. But you can only see a local loss (as in, a capital loss) if you sell the shares. Retirees can avoid losses by investing in companies with strong fundamentals and holding on to volatility.
It’s okay to sell a position if the fundamentals change too much, or if you’re balancing and selling is part of your strategy. However, a decline in the stock price should not prompt investors to sell their shares if the fundamentals and long-term conditions remain the same.
Retirees can also reduce the risk of losing money by building a savings account that can cover their living expenses. Financial advisors generally recommend having enough cash to cover three to six months of living expenses, but retirees may want to build this up to enough cash to cover a year or two. That way, investors can ride out volatility and corrections without selling stocks at low prices.
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Avoid common mistakes
No investor is perfect, but avoiding some common mistakes can keep you out of trouble and make it easier to recover from unrealized losses. Chasing high yields can be a common mistake for retirees, for example.
Although high yields look attractive on the surface, those yields may indicate poor fundamentals. High-yield stocks with diminishing fundamentals may not be able to continue paying their dividends, and a single dividend cut or suspension may be enough to send investors scurrying for the exits.
Another common mistake is to over trade, which can lead to excessive fees and spreads that reduce your profits. All trades can make investors vulnerable to their emotions, which can lead to exiting positions early. As the saying goes, it is better to spend time in the market than to spend time in the market. Patience often pays off for long-term investors who choose stocks and funds with strong long-term fundamentals.
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