Understanding The Warren Buffett Retirement Investment Strategy
If you invest your money, read a financial journal, want to excel at financial planning, and are striving to grow financially with every move, you must have heard of the famous Warren Buffett. Warren Buffett is nothing short of royalty in the world of finances. He is often found on the list of some of the world’s wealthiest people. His books are bestsellers and have helped several people achieve their financial goals with greater simplicity and ease. He is the CEO of Berkshire Hathaway and an avid investor and philanthropist. His current net worth is estimated to be around $101 billion. While achieving the same kind of financial standing as him may or not may be possible for everyone, following in his footsteps and applying his retirement investment strategy to your financial plan may be beneficial in many ways.
The Warren Buffett investment strategy is a tried and tested strategy that has helped many investors in the past. This simple strategy can be instrumental for investors preparing for retirement as it offers capital appreciation and the likelihood of a financially stable and comfortable retirement. To know more about different financial planning strategies and the most suitable one for your needs, you can consult with a professional financial advisor and get clarity on any doubts that you may have.
Keep reading to know more about the Warren Buffett guide to retirement investing and how it can help you.
What is the Warren Buffett investment strategy?
Warren Buffet follows an indexed approach to investing. Here’s how it works:
Warren Buffett 90/10 rule
The Warren Buffett 90/10 rule is perhaps one of the most popular investment strategies of all time. In 2014, Warren Buffett wrote a letter to the shareholders of his company, Berkshire Hathaway. In this letter, he advised the trustees to divide the cash into two categories. 10% of the cash was to be put in short-term government bonds. And, the remaining 90% in a low cost S&P 500 index fund. He even recommended Vanguard. Warren Buffet believed that the long term gains from this strategy could be better than what most investors get.
This letter and the advice from Warren Buffett may be hard to comprehend. But in order to understand this, you must first understand what an index fund is. An index fund is a passively managed fund. Index funds are a type of mutual fund or an exchange traded fund (ETF) that follows a benchmark index. It is not possible to invest in an index directly, but you can invest in an index mutual fund or an index ETF.
Warren Buffett recommends an index fund that tracks the S&P 500. This index contains the largest 500 publicly traded companies in the United States and roughly constitutes 80% of the stock market’s value. As a result, they can determine the performance of the market. Since index funds mimic the performance of an index, your profits are dependent on how the index performs. Warren Buffett advises putting 90% of your funds in an index fund that tracks the S&P 500. When this index rises, your index fund will also accumulate returns.
While 90% of your money is invested in a stock based index, the other 10% should be invested in short term government bonds as per Warren Buffett guide to retirement investing. Short term government bonds are used to finance government projects, which makes them considerably less risky. These short term securities have a maturity of fewer than five years. Bonds help to lower the overall risk from your investment portfolio and can be good for diversification. Moreover, they offer stable dividends, interest payments, and the safety of capital compared to stocks. Bonds can also be more liquid as they offer income periodically.
Not paying fund fees
It is also advised to avoid high-fee managers since investing fees can eat into your profits and render them worthless. Moreover, when you are investing on a regular basis, the associated fee can add up to a lot. Even a meager percentage can turn into significant amounts of money over the long term. According to the Warren Buffett investment strategy, investing in a low cost fund instead can be a lot more profitable.
Invest and forget
Warren Buffet suggests that as long as you are following the index approach of investing and the Warren Buffett 90/ 10 rule, you do not need to worry about rebalancing or reallocating your money periodically. The concerns over market volatility and portfolio rebalancing are all eliminated in this strategy.
What are the shortcomings of the Warren Buffett investment strategy?
While Warren Buffett’s retirement investment plan has gained traction and worldwide popularity, it has also been criticized by several investors. Here are some shortcomings of the Warren Buffett investment strategy:
- By following only an index based approach with little weightage to bonds, the investment portfolio misses out on one of the most important things – diversification. Generally, financial experts recommend a mix of different investments like stocks, bonds, gold, real estate, international funds, etc., to ensure better growth and lower risk. This helps to counter the market volatility. As when one investment falls, the other one picks up and vice versa.
- Some financial advisors also feel that Warren Buffett’s strategy only would be suitable for high-risk investors or young investors with a long investment horizon. But it cannot be ideal for older investors. Since index funds mimic the benchmark index, a portfolio with 90% of stocks could be catastrophic to those nearing retirement in case of a recession.
Should you follow the Warren Buffett investment strategy?
There are different strategies to follow when it comes to investing. The one size fits all approach cannot be applied to every situation. So, following the Warren Buffett 90/10 rule is a personal decision for every investor. Using this investment strategy can be ideal for young investors with a long investment horizon as the chances of risk are distributed over time.
If you find the Warren Buffett guide to retirement investing a bit risky and problematic, you can also consider the 100 rule. The 100 rule is another popular rule according to which, your asset allocation should be relative to your age. So, for instance, if you are 50 years old, your asset allocation should be 50% in bonds and 50% in stocks. At the age of 60, this should change to 60% in bonds and 40% in stocks. The idea is to decrease your investment in stocks as you age to preserve capital and keep a low risk appetite. So, the percentage of stocks should be the highest when you are young and gradually decrease as you age.
Some aspects of Warren Buffett’s advice can be helpful for people of all ages. For instance, regardless of your age, saving money on fees can benefit you.
What are some other investment tips from Warren Buffett?
Given below are some of Warren Buffett’s quotes that can be applied in most situations and help investors in their journey to financial freedom:
1. “If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes”:
The benefits of holding your investment for the long term cannot be stressed upon enough. Not reacting to short term volatility and holding your investment till maturity can be a great way to grow financially and, at the same time, avoid risk. A longer term lowers your risk and offers you a longer and better chance of growth.
2. “Remember that the stock market is a manic depressive”:
When it comes to stock market investing, it is never advised to let your emotions get the better of you. The stock market is extremely fickle and unpredictable. Prices can fluctuate, and your profits can turn into losses unexpectedly. Short term events may not always impact your long term goals. So, instead of panicking or making decisions in haste, it is better to be thoughtful, rational, and smart about your investment. If you are in doubt, consulting a professional financial advisor can also help.
3. “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ”:
Investing is feared by a lot of people due to its intricacies and instability. However, it does not have to be so complex. While there are some investment instruments that can be more suitable for experienced investors, you can invest and make profits as a beginner too. Mutual funds, bonds, employer sponsored workplace plans, individual retirement accounts, etc., are some beginner friendly investment options that can offer stable returns. The important thing to note is not to hold yourself back and instead take a leap of faith and start investing. Slowly, with confidence, you can master the technique too.
4. “Never invest in a business you cannot understand”:
As the world is growing with several investment avenues, newer businesses are coming up, which can make it hard to pick the right fit for you. For instance, crypto currency and non fungible tokens (NFTs) are the latest rage these days. However, unless you understand what these are and what they entail, it may not be advised to invest in them. It is important to understand where you put your money. For example, if you are investing in a pharmaceutical company, you must try to learn more about the business, the possibility of profit and loss of the industry due to political or global events, the demand and supply of the products of the company, etc. This can help you determine the likelihood of the company’s growth.
To conclude
The Warren Buffett guide to retirement investing is a roadmap that may help several investors achieve their financial goals. However, it is not a universal route that can accommodate everyone. Ultimately, you have to assess your unique financial situation and see whether or not you can benefit from such a strategy. If not, there are other strategies that you can try to assess which one best fits your financial objectives. The most important thing is to have a clear understanding of your goals, so you can make the right decisions at the right time. On occasions when you are unable to decide what to do or where and how to invest your money, you can reach out to a financial advisor for professional help.
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