The Perfect Time to Invest Like Warren Buffett

Published by Rebecca Lake, US News & World Report

Buying and holding harnesses a young investor’s greatest asset: time.

Millennials are big on saving. According to Transamerica, 39 percent of millennials are funneling more than 10 percent of their salary into savings. But investing? That’s a different story. Only one in three millennials invests in the stock market, according to Bankrate. Research from Ally Invest found that fear overwhelmingly keeps young adults from investing.That fear could mean missing out on portfolio growth, but buying and holding early on typically pays off in the long run. Just ask the world’s most successful buy-and-hold investor, Warren Buffett.

Discipline and patience rank as two of the Oracle of Omaha’s most important traits that investors should emulate. Buy-and-hold investors must be diligent about sticking to their strategy, and “they can’t be influenced by other people,” says Paul West, managing partner at Carson Wealth in Omaha, Nebraska.

For first-time investors whose retirement is decades away, the time to adopt a buy-and-hold mindset like Buffett’s is now.

The benefits are many. “Buy-and-hold investing is a very efficient way to invest in terms of transaction fees and taxes,” says Rick Wedell, chief investment officer at RFG Advisory in Birmingham, Alabama. “You trade less frequently, which means lower costs, and you generally only pay long-term capital gains taxes when gains are realized, which doesn’t happen frequently if you’re holding on to securities for the long term.”

Wedell says those are important factors younger investors should consider when investing in taxable accounts. Even if you’re buying low-cost, tax-efficient investments like exchange-traded funds, delaying gains over a longer window can work in your favor. Buying and holding can also be less stressful. “If you’re focused on things like how many shares you own instead of the current market value of your portfolio, it tends to make the wild ride of the market a little more palatable.”

Recent history is a prime example. In 2017, investors saw stocks climb steadily upward, which lulled some investors to sleep, says Mark Rose, an investment advisor representative with Investment Strategies in Oklahoma City. The volatile first quarter in 2018 illustrates how difficult it is to predict which way the market will move. “A strict buy-and-hold investor would buy and let it ride.”

That takes emotions out of the process, says Dwain Phelps, owner of Phelps Financial Group in Kennesaw, Georgia. “Two emotions are always present when investing: fear and greed.” Buying and holding encourages patience, so that your decision-making isn’t jeopardized by spur-of-the-moment choices.

Perhaps the strategy’s most significant benefit for younger investors is capitalizing on their greatest asset: time. “Investors with decades in front of them have a huge opportunity to take advantage of compounding interest,” says Amanda Lawson, communications specialist at Matson Money in Scottsdale, Arizona. She says a millennial who invests $100 a month and generates a 12 percent average rate of return from holding investments long term could have a portfolio worth nearly $2.4 million by age 65.

Starting early can also help counter inflation. When investment returns greatly outpace inflation, your purchasing power can keep pace with rising prices. For younger investors, “a buy-and-hold mindset can be critical to getting those kind of returns,” Lawson says.

Trying to time the market is futile. It’s impossible to predict exactly when to get into the market – or when to get out. Buy-and-hold investing sidesteps that dilemma altogether.

“There really is no right or wrong time to begin investing with a buy-and-hold approach,” Wedell says. “Volatility may make it easier to find entry points, but there are plenty of attractive companies out there in every market environment if you’re willing to do the work and look for them.”

This fundamental analysis of what you invest in is critical, Rose says. “Investors need to build a portfolio that fits with their investment philosophy, risk tolerance, time horizon and social responsibility desire.”

Doing your homework makes you a more informed investor, but it has another benefit. “Research leads to confidence,” Phelps says, “and that’s when investors should invest.”

As you shape your portfolio, aim for balance in your holdings. “Always remember to diversify with a mix of stocks and bonds,” says Adam Grealish, senior quantitative researcher at online investment company Betterment. You need stocks to generate growth, while bonds are a less volatile counterweight. Diversifying lowers your overall risk profile.

Lawson says the three rules of creating a long-term portfolio are owning equities, diversifying and rebalancing. When you’re investing in both stocks and bonds, “it’s important to rebalance your portfolio back to the target amount of fixed income versus equities to keep your volatility in line with what you’re comfortable with.”

Not putting all your eggs in one basket avoids disaster if one of your investment categories gets crushed, says Steve Azoury, owner of Azoury Financial in Troy, Michigan. Rebalancing regularly also helps you weed out underperformers.

The strategy isn’t perfect. Like any other investing strategy, buying and holding has its flaws. “The primary disadvantage is that you have to commit your money for a longer period,” says Paul Lightfoot, president of Optima Asset Management in Dallas. As a result, some of your money should be kept out of the market in a liquid account for emergencies so that you won’t need to sell assets at an inopportune time.

Another challenge of buying and holding is being consistent, even when the market is not. “You must have conviction,” West says, and not let yourself be diverted from your overall plan.

Grealish says younger investors must be prepared for market drops, which can be distressing. When they occur, “focus on what you can control.” That includes making sure your portfolio risk reflects your target and you’re saving enough to reach your goals. “Taking the long view helps keep things in perspective.”

Historical data can also reassure buy-and-hold investors, Rose says. “It’s not a guarantee of future returns, but it provides another piece for investors to evaluate if this strategy is for them.”

Lightfoot says the best lesson buy-and-hold investors can learn is to tune out market news. “Set guidelines for how you’ll invest, ignore all the noise in the media and stick to your plan.”

US News & World Report

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