Smart Retirement Investing, Buffet Style
Reprinted courtesy of MarketWatch.com
Published: April 10, 2013
To read the original article click here
I have learned a lot from Warren Buffett, widely regarded as one of the best investors of our times, and I keep learning more.
One of my favorite quotations is this: “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”
This reminds me to think about the things I have done right in my life and the things I have done wrong. (There are plenty of items on each list, believe me!)
(See my prior articles “7 Bad Habits That Can Ruin Your Retirement” and “A Simple Secret to Retirement Investing.”)
Many people think the best investors are the smartest investors. And while I would never recommend stupidity, consider these two gems from Warren Buffett:
“The most important quality for an investor is temperament, not intellect.”
“Investing is simple, but not easy.”
I think “easy” starts when you bring “the right stuff” to the table. As I outlined in my 2011 book, “Financial Fitness Forever,” your habits and your attitudes will determine your ultimate success much more than what newsletter you read or what manager you hire.
Let’s look at a few more Warren Buffett quotes that I like.
Buffett: “The most important thing to do if you find yourself in a hole is to stop digging. … Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
Comment: Investors spend a lot of time and emotional energy trying to justify what they have done in the past. Sometimes they will spend years trying to mend an investment strategy that’s fundamentally broken.
Advice: When you recognize you’re on the wrong path, stop what you’re doing. Get a good road map and identify the investments that are most likely to lead you to success. (See my prior article “10 Steps to Rebuilding Your Retirement Portfolio.”)
Then make a plan and move in the right direction. This might be emotionally painful, but you’ll feel much more pain if you reach retirement without enough money.
Buffett: “Risk comes from not knowing what you are doing.”
Comment: Most of us think we know more than we really do about all sorts of things. Our brains are wired to give us confidence, even if it’s false confidence. Investors who own individual stocks typically think they understand the companies. They may be familiar with the products. They may have read a few articles or listened to somebody tout the stock on radio or television. They may even work in the industry.
Some people think that’s a smart way to invest. I think it’s downright dumb. Anything you can learn about a company, unless you have insider information, is well known to the thousands of professional investors who spend most of their waking hours studying the market. If those pros know something, you can bet your shirt that such knowledge is already discounted in the price of the stock.
Advice: Invest based on what you really know. For example, it’s easy to know that small-cap value stocks, as an asset class, have a very long history of beating the Standard & Poor’s 500 Index and are likely to continue doing so.
You can know that ZYX Corp. is a small-cap value stock, but you can’t know whether or not it will sink or swim.
Therefore, invest in the asset class, not the individual stocks.
Buffet: “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
Comment: This most famous Buffetism deserves top billing for retirees. In an appendix of my book “Financial Fitness Forever,” I compared the results of two hypothetical retirement portfolios that started out with equal values and produced identical income to the investor.
After 41 years of withdrawals, computed at 4% of the initial value every year, adjusted annually for inflation, the portfolio that was more conservatively invested was worth nearly three times as much as the one that was invested exclusively in the S&P 500 Index. There was only one reason for that difference: The conservative portfolio reduced the losses during several major bear markets.
Advice: When you’re withdrawing money, your top allocation priority should be making sure your portfolio avoids catastrophic losses. Remember Rule No. 1 and Rule No. 2.
Mr. Buffett has many more worthwhile gems, and we’ll look at a few more next week.
For readers who want more, I heartily recommend Larry Swedroe’s latest book, “Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals.”
It’s an easy read, ideally suited for new investors who want to get off on the right foot without wading through a lot of data. It is also a great reality check for those of us with some years (or decades) of experience under our belts.
Richard Buck contributed to this article.
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