Surprisingly, good investing is relatively simple. Although that doesn’t mean to say it’s easy. Well known investment pioneer Warren Buffett’s approach can be summed up as buying great businesses, and then holding them for as long as they remain great businesses.
Sounds straightforward enough, doesn’t it? In this article, we delve deeper into Buffett’s tried and tested approach so we can share some steps you can take to improve your investing experience.
Invest your life savings in a way you can understand
One rule of thumb that can be your guide here is: if it sounds too good to be true, it almost always is.
Our human tendency to try and “win” by beating the market, or doing better than other investors, means people become tempted to invest their hard-earned wealth in complex financial products.
Even as financial professionals, there are many products available that we consider to be all “smoke and mirrors”. If we can’t understand how the returns are derived, how can your average investor be expected to do so?
Jargon often makes people question their own knowledge, rather than seeing a potential investment for what it is and truly understanding the risks.
When investing your life savings, even if you have a deep understanding of the world of investments, it’s best to rely on what’s always worked, rather than trying to identify the latest fad.
Buy and hold. Take a long-term view
When it comes to investing, long term means more than a decade.
This means patience plays an important part in achieving investment success. Your average retirement is three decades, so definitely qualifies as long term, giving plenty of time for carefully thought through investment decisions to play out.
Frequent changes to the holdings in your investment portfolio drive up the costs you incur. This may seem negligible at first glance, but over many decades, these additional costs erode your wealth significantly.
So, avoid making hasty decisions and only buy investments you’d be comfortable holding for the long term.
Keep calm and don’t fear a market crash
The media reports on the markets as if their only purpose is for gambling; a get-rich-quick option, rather than an opportunity for long-term growth.
It’s generally accepted that investors react emotionally to economic and political news. The media feeds our fear of missing out (FOMO) as well as the fear of suffering significant investment losses.
If you’re taking a long-term view and investing in a globally diversified portfolio, letting fear get the better of you can be a costly mistake. It can cause you to make irrational decisions, effectively locking in losses when the market has declined, then missing out on the gains that history has shown us time and again, following a market decline.
Investors are driven by a desire to know where they stand, but the price of this certainty is high!
Market ups and downs are an entirely normal part of market behaviour.
When markets are imploding and others are losing their heads, Buffett’s advice is to remain calm and rational. The ideal investing temperament.
As well as remaining invested, you can take this one step further by seeing a temporary market decline as an opportunity. Some people queue for hours when their favourite brand holds a sale. So rather than being fearful of a market decline, how about seeing it as an opportunity to buy more at a lower price?
Creating a list of “investing rules” that you believe in, can be a source of reassurance if you feel anxious during periods of market decline.
This is the equivalent to having a co-pilot or mentor by your side when times get tough. Look out for more on this next month.
As another renowned investor Benjamin Graham said: “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.”
Take a systematic approach
To weather market volatility you need a well-diversified global portfolio that gives you the highest probability of achieving the outcomes you’re looking for, whatever the market conditions.
Buffett believes that most investors are better off adopting a number of low-cost market trackers to form their investment portfolio.
To help demonstrate his point, in 2008 he very publicly wagered $1 million that a low-cost tracker fund would outperform one of the top US hedge fund managers – Protégé Partners – over a 10-year period.
Buffett’s $1 million strategy produced $1,854,000 (gaining 7.1% a year), over the same period a Protégé Partners style investment would have produced $1,220,000 (gaining 2.2% a year). That’s a gap of $634,000.1
Buffett acknowledges that from time to time some active managers do outperform the market. But knowing which manager will outperform over the next 10 years is like trying to find the proverbial needle in a haystack. Impossible!
The reality is that investment markets are unpredictable. But, if harnessed in the right way, this needn’t make your future unpredictable.
If you’d like help making smarter investment decisions, we’d love to hear from you. Please contact us at firstname.lastname@example.org, or call 01202 025481.
Please note, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.