Legendary investor and chairperson of Berkshire Hathaway Warren Buffett has offered plenty of investing advice throughout the years. One of the common and potentially costly mistakes he warns investors against is letting emotions drive their investing moves.
This error can hurt any investor, but it’s especially risky for those in or nearing retirement.
Don’t let fear drive your decisions
It’s easy to become fearful of losing money during a market pullback, or fearful of missing out when an asset is soaring. But pulling your cash to the sidelines or chasing speculative investment options can do significant harm to your long-term financial goals. You could risk locking in losses or pouring money into an investment that doesn’t have strong fundamentals and ends up plummeting.
To be clear, there are ways to take advantage of market swings. One of Buffett’s most famous pieces of advice is to be greedy when others are fearful, or zigging when others are zagging. But it’s important to be strategic and consider your goals, risk tolerance and time horizon. For example, you can limit yourself to only investing a certain amount of money when stocks drop below a specific threshold, or sell a certain amount when a stock soars and your portfolio becomes overexposed.
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Why this especially hurts investors over age 50
If you sell during corrections, you miss out on rebounds. But while someone in their 20s has the time to recover from losses, people in their 50s don’t have as long of a time horizon.
When you’re closer to retirement, you’ve likely been saving for years and watching your portfolio grow. If you have $1 million or more saved for retirement, you may have more at risk and less time to recover than a younger investor with a smaller portfolio. That type of loss can force some people to work a few extra years or have to change their lifestyle in retirement.
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What Buffett does instead
Buffett is a proponent of investing for the long term. He recommends finding strong, durable companies with shares you’d be comfortable holding for years — not flashy stocks that could just be fads.
He also recommends investing in low-cost index funds that offer broad diversification instead of putting all of your eggs in one basket.
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A smart approach for investors nearing retirement
Investing for long-term goals such as retirement requires balance. While fear can force you to keep your cash on the sidelines, the excitement that comes with seeing a stock soar may push you to chase returns ineffectively.
Don’t go to either extreme. You can gradually adjust asset allocation as you get older, retirement becomes within reach and your risk tolerance changes. Rebalancing across lower-risk assets and holding some of your growth-oriented investments instead of panic selling is a solid approach for many investors. You can also sell some investments during market rallies — a strategy called rebalancing — to ensure your strategic asset allocation is still intact.
People who are approaching retirement can also have a separate income strategy that focuses on dividend stocks and bonds. Financial advisors also recommend building a cash buffer that can cover at least one to two years of your years of living expenses, so you aren’t forced to sell stocks during corrections to cover your needs.
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