Legendary investor Warren Buffett opts for simplicity when it comes to investing, and his strategy can be boiled down to one succinct point: don’t lose money.
That rule may sound obvious, but when faced with market volatility and trendy investment options, investors are often tempted to make moves that could cause them to lose money. But avoiding risky, speculative assets and focusing on the long term can help retirees make their money last.
Understand risk and volatility
Risk and volatility are normal aspects of investing in the stock market — but they shouldn’t be confused. A low-risk stock or bond can endure periods of sharp volatility, while high-risk assets can have stretches of low volatility. A stock’s volatility simply refers to how sharply the price moves in either direction. If a stock moves from $20 to $25 and then drops to $18 within a week, it is volatile. However, if a stock hovers between $30 and $33 for an entire year, it’s not as volatile.
Risk, on the other hand, reflects the possibility of losing money from an investment. Utility companies are viewed as low-risk assets since they typically generate stable cash flow, and consumers buy utilities during all economic cycles. Unprofitable growth stocks are riskier since a failure to deliver profits can eventually translate into long-term losses.
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Don’t panic sell
Investing in stocks doesn’t guarantee that you will profit every day — in fact, you’re bound to see plenty of market downturns. But you can only realize losses in a position (as in, lose money) if you sell shares. Retirees can avoid losses by investing in companies with solid fundamentals and holding them through volatility.
It’s okay to sell a position if the fundamentals change significantly, or if you’re rebalancing and selling is part of your strategy. However, a declining stock price shouldn’t necessarily prompt investors to sell their shares if the fundamentals and long-term tailwinds remain intact.
Retirees can also reduce their risk of losing money by building a cash reserve that can cover their living expenses. Financial advisors typically recommend having enough cash to cover three to six months of living expenses, but retirees may want to bump this up to enough cash to cover one or two years. That way, investors can ride volatility and corrections without having to sell stocks at low prices.
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Avoid common mistakes
No investor is perfect, but avoiding some of the most common mistakes can keep you out of trouble and make it easier to recover from unrealized losses. Chasing high yields can be a common blunder for retirees, for instance.
While high yields look attractive on the surface, those yields may reflect poor fundamentals. High-yield stocks with declining fundamentals may not be able to keep paying out their dividends, and a single dividend cut or suspension may be enough to send investors rushing for the exit.
Another common mistake is overtrading, which can result in excessive fees and spreads that minimize your profits. All of the trading can also make investors more susceptible to their emotions, which can result in exiting positions too early. As the adage goes, it’s better to spend time in the market than to time the market. Patience typically pays off for long-term investors who pick stocks and funds with robust long-term fundamentals.
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