Retirement a la Warren Buffett
Reprinted courtesy of MarketWatch.com
Published: April 17, 2013
To read the original article click here
In last week’s column I discussed several of Warren Buffett’s many quotations that can help all investors, especially retirees, get on the right track and stay there.
Buffett is legendary for his portfolio of carefully chosen stocks, but even he has been unable to avoid some major setbacks. He’s smart enough to essentially say: Do as I say, not as I do.
Most investors, both individual and institutional, he once said, “will find that the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.”
I personally follow this easy, inexpensive route to above-average returns, and I recommend it without reservation.
Now let’s look at a few more pearls of Warren Buffett wisdom, along with my own commentary and advice.
Buffett:“It’s nice to have a lot of money, but you know, you don’t want to keep it around forever. I prefer buying things. Otherwise, it’s a little like saving sex for your old age.”
Commentary: When people retire, they typically have to shift their thinking in quite a few ways. One common challenge is making the switch from accumulating money to living off the money they have saved. This can involve changing a lifetime of habits and attitudes.
This transition is an important part of being a successful investor. As you seek to find the right balance between security for the future and the enjoyment of life in the present, you will find it easier if you’re confident that you aren’t making big mistakes.
Advice: Unless you are sure of what you’re doing, use the services of a financial adviser to find the right way to invest and withdraw your money. While cookie-cutter approaches seem simple, they rarely produce the optimal result for each individual set of circumstances and personalities.
Buffett:“I do know that when I am 60, I should be attempting to achieve different personal goals than those which had priority at age 20.”
Commentary: This is a variation of the previous quotation, aimed at people who continue to think and act like accumulators when they should be preparing to withdraw money.
Investors who successfully employed high-risk strategies when they were accumulating may find this especially challenging. Their very success may mask the danger that they are at high risk of giving back their gains unless they defend them with a more conservative approach. Personally, I started moving from accumulation to distribution about five years before I retired.
Advice: Expect that your objectives will evolve over time, and change your actions accordingly. If you have trouble with this, get help from a financial adviser.
Buffett:“Never ask a barber if you need a haircut.”
Commentary: This is like never asking an insurance salesman whether you need insurance. Buffett is reminding us that many investment professionals are salespeople first and advisers second.
On Wall Street, virtually everybody has a financial incentive to persuade you to do something other than what you’re already doing. What seems like advice is often really sales.
Advice: Do whatever it takes in order to understand what’s in your best interest and what’s not. If you don’t do that, the financial community will regard you as somebody who’s essentially wearing a big target on your chest. To put it bluntly, don’t be their prey.
Buffett:“What the wise do in the beginning, fools do in the end.”
Commentary: Fad investments are usually the kiss of death. Billions of dollars were lost by people chasing the hot returns of Internet and other technology stocks in the late 1990s. This disaster wasn’t something new. It’s the outcome of almost every fad investment I’ve ever known about. Eventually, people figure this out. But too often they wise up only after they have lost many thousands of dollars.
Advice: If your money is important to you and your family, don’t gamble on “new-era investments. Stick with what’s tried and true.
Buffett:“An investor should act as though he had a lifetime decision card with just 20 punches on it.”
Commentary: This is another way of saying that all it takes is a handful of great decisions to get you on the right track — and paradoxically all it takes is a few terrible decisions to ruin your success.
Advice: Treat every investment decision as a major one, and make each one very carefully, as if you will have to live with it forever.
And this leads to another great Buffetism.
Buffett: “Our favorite holding period is forever.”
Commentary: This is the contrast between the long term and the short term.
Advice: Take as much time as you need in order to buy what you’ll be willing to own permanently. If you knew you could not under any circumstances sell an investment for the rest of your life, would you still buy it?
That’s a very tough test, but it’s one that index funds can pass. Individual stocks often fail despite all intentions and expectations. But there has never been an index fund that failed permanently.
Richard Buck contributed to this article.
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