7 Personal Finance Tips From Warren Buffett

Warren Buffett is generally considered to be the best long-term investor of all time, so it’s no wonder many people like to listen closely to Buffett’s words of wisdom, in order to apply them to their own lives. With that in mind, here are seven of the best personal finance lessons I’ve learned from Warren Buffett over the years.

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1. “Someone’s sitting in the shade today because someone planted a tree a long time ago”

The lesson here is to be a forward thinker when it comes to personal finance, whether you’re talking about investing, saving, or spending. When you’re deciding whether to put some more money aside for emergencies, think of a financial emergency actually happening and how much easier your life will be if you have enough money set aside.

Similarly, few people get rich quick by investing, and most people who try end up going broke. The most certain path to wealth (and the one Buffett took) is to build your portfolio one step at a time, and keep your focus on the long run.

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2. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”

In addition to this, one of my all-time favorite Warren Buffett quotes is “our favorite holding period is forever,” which is also one of the most misunderstood things he says. The point isn’t that Buffett only invests in stocks he’s going to buy and forget about — after all, Buffett’s company Berkshire Hathaway sells stocks regularly, and for a variety of reasons. Rather, what Buffett is saying is to invest in stable, established businesses that have durable competitive advantages. That is, approach your investments with the long term in mind, but keep an eye on them to make sure your original reasons for buying still apply.

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3. “Price is what you pay; value is what you get”

When you’re buying an investment (or anything else for that matter), the price you pay and the value you receive are often two very different things. In other words, you should buy a stock if you believe its share price is less than the intrinsic value of the business — not simply because you think the price is low.

For example, if a market correction hit tomorrow and a certain stock were to fall by 10% along with the overall market, would the business inherently be worth 10% less than it is today? Probably not. Similarly, if a stock rose rapidly, it wouldn’t necessarily mean that the value of the underlying business had risen as well. Be sure you consider value and price separately when making investing decisions.

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4. “Cash … is to a business as oxygen is to an individual: never thought about when it is present, the only thing in mind when it is absent”

One of the reasons Berkshire Hathaway not only survives recessions and crashes, but tends to come out of them even better than it went in, is that Warren Buffett understands the value of keeping an “emergency fund.” In fact, when the market was crashing in 2008, Berkshire had enough cash on hand to make several lucrative investments, such as its purchase of Goldman Sachs warrants.

Granted, Berkshire Hathaway’s rainy-day fund is probably a bit bigger than yours; Buffett insists on keeping a minimum of $20 billion in cash at all times, and the current total is around $85 billion. However, the same applies to your own financial health. If you have a decent stockpile of cash on the sidelines, you’ll be much better equipped to deal with whatever financial challenges and opportunities life throws at you.

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5. “Risk comes from not knowing what you’re doing”

In Buffett’s mind, one of the best investments you can make is in yourself and the knowledge you have. This is why Buffett spends hours of every day reading, and has done so for most of his life. The better educated you are on a topic, whether it’s investing or anything else, the better equipped you’ll be to make wise decisions and avoid unnecessary risks. As Buffett’s partner Charlie Munger has advised: “Go to bed smarter than when you woke up.”

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6. Most people should avoid individual stocks

This may seem like strange advice coming from Warren Buffett, since he’s widely regarded as one of the best stock-pickers of all time.

However, Buffett has said on several occasions that the best investment for most people is a basic, low-cost S&P 500 index fund, like the one he is using in a bet to outperform a basket of hedge funds. The idea is that investing in the S&P 500 is simply a bet on American business as a whole, which is almost certain to be a winner over time.

To be clear, Buffett isn’t against buying individual stocks if you have the time, knowledge, and desire to do it right. He’s said that if you have six to eight hours per week to dedicate to investing, individual stocks can be a smart idea. If not, you should probably stick with low-cost index funds.

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7. Remember to give back

Warren Buffett is a co-founder of and participant in The Giving Pledge, which encourages billionaires to give their fortunes away. Buffett plans to give virtually all of his money to charity, and since he signed the pledge, he has given away billions of dollars’ worth of his Berkshire shares to benefit various charitable organizations.

Buffett once said, “If you’re in the luckiest one percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.” And even if you’re not a member of the 1%, it’s still important to find ways to give back.

 

 

 

Written By: Matthew Frankel
Source: The Motley Fool

How To Avoid A 401(k) Meltdown If The Trump Rally Fizzles

Millions of Americans are asking the wrong questions when it comes to their retirement plans. It’s not “how much should I invest now?” or “is the market safe?” You should invest as much as you can in every kind of market.

So forget about the question of whether the “Trump rally” is over, or taking a pause. If that’s your concern, you’re focused on the wrong thing.

Despite this reality, far too many investors are trying to find the right fund manager who can somehow predict and navigate the rocky seas the market will toss up. In rare cases, some managers get lucky and get in and out at the right time. But most don’t have this ability.

Most of us want to believe that professional money managers know just when to get in and out of stocks. We put a lot of faith in them — and mis-spend some $2 trillion in fees hoping that they’ll be right and protect our money.

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The numbers don’t lie, however. Most managers can’t do better than passive market averages and rarely outperform after you subtract their fees. So if you’re placing your trust in active management, you’re headed for a meltdown sooner or later.

A recent study by Jeff Ptak at Morningstar shows the folly of active management for most investors.

Ptak looked a the relationship between what actively managed funds return to the fees they charge for management. In most cases, expenses will cancel out most significant gains.

“Fees haven’t fallen that steeply, and, as a result more than two-thirds of U.S. stock funds levy annual expenses that would wipe out their estimated future pre-fee excess returns.”

What this means is that active managers who time the market aren’t likely to outperform passive baskets of stocks. When you subtract their fees, you’re not coming out ahead.

Fees take an even bigger bite when overall market returns are lower. If stocks return less than double digits, you’re going to feel the pain even more.

Ptak is blunt in his conclusion: “Many active stock funds are too expensive to succeed. The exceptions are small-cap funds, where it appears fees are still below estimated pre-fee excess returns.”

What can you do to avoid the meltdown of overpriced, actively managed funds? It’s a pretty simple process.

1) Find the lowest-cost index funds to cover U.S. and global stocks and bonds. Expense ratios shouldn’t be more than 0.20% annually (as opposed to 1% or more for active funds).

2) If you still want active funds in your portfolio, they should be highly-rated managers who invest in smaller companies.

3) Make sure that the “active” part of your portfolio is no more than 30% of your total holdings. While this is an arbitrary percentage, it will provide some buffer against market timing decisions.

You should also avoid the error of picking funds based on their past performance, which can never be guaranteed. So, instead of asking how they performed, you should ask “how many securities can they hold for the lowest-possible cost.”

 

10 Blunders Investors Make with their Money

No investor is perfect, but hanging onto an imperfection a bit too long can add up to the point where it wrecks a portfolio, cuts a hole in your wallet or costs you a ton of money somewhere down the line.

Here’s the rub: How do you know you’ve made a mistake when you had no idea you were chasing your tail in the first place? Ignorance is one thing; smart investing requires a never-ending cycle of learning. But blissful ignorance is quite another.

“The absolute worst money mistake is sticking your head in the sand,” says Cary Guffey, a financial advisor with PNC Wealth Management. “Whatever the issue you are dealing with, the problem will not simply go away. The very first thing you have to do is confront and admit you have an issue. Until this happens, your situation will not improve.”

Here are 10 common gaffes investors make – some emotional, some behavioral, but all avoidable.

1. Chasing a stock, no matter the price.

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It’s too easy to get intoxicated by a growth industry or sizzling stock. “Ben Graham’s famous quote [that] short term, the market is a voting machine but long term, a weighing machine, is still applicable,” says Yale Bock, founder and president of YH&C Investments in Las Vegas and manager of two portfolios on Covestor, an online investment management platform. Highflying growth companies “are always part of the investment landscape, but the potential for severe capital losses increases if those companies fail to continue growing their revenues, cash flow and profits,” he says.

2. Not keeping your emotions in check.

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Nothing hurts an investor quite like irrational feelings that override rational choices. “Don’t let your emotions allow you to fall prey to gimmicks and trying to beat the market,” says Scott Puritz, managing director of Rebalance IRA, an online retirement investment advisory. “Instead, opt for a simple, straightforward investing strategy. Likewise, investors who go it alone often feel anxious and ashamed by their lack of experience, and these emotions can cloud judgment.”

3. Ignoring the contrarians. 

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Contrarians aren’t always right – but when they establish a track record over the long run, they’re worth listening to. “Often the best investment ideas are contrarian,” says Daniel Beckerman, president of Beckerman Institutional in Oakhurst, New Jersey, and a portfolio manager on Covestor. “Sentiment was extremely low in early 2009 after the financial crisis when stocks hit their lows. In retrospect, this was the best entry point for stocks in recent years.”

4. Misreading probabilities. 

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Yes, it’s “buy low, sell high” – but sometimes what’s perceived as high is really somewhere in the middle, if given enough time. “I constantly hear folks say that markets are at an all-time high, so we should get out of the stocks before they drop,” says Benjamin Schwartz, a senior financial planning associate with Plancorp, headquartered in St. Louis. “While that may seem intuitive, statistically this logic does not hold up. Future returns are independent of past returns – just as a coin toss does not determine how it will land based on previous flips.”

5. Failing to ask the right questions. 

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Too many people blindly hand their money over to financial firms and money managers, hoping for the best, says Bobby Monks, co-author of “Invested: How Wall Street Hijacks Your Money and How to Fight Back.” These investors “dramatically increase their risk of ending up with lousy investments and overpaying for them. And it’s not enough to simply ask questions. You need to understand the answers; for example, how they’re compensated and whether they put a meaningful amount of their own money in the investments they sell you,” Monks says.

6. Not periodically rebalancing your portfolio. 

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Whether they’re winning or losing, many investors are reluctant to sell, Guffey says. “The thinking goes that if something has made money in the past, it will continue in the future. The other side of the coin is when something is down, an investor starts telling themselves they will sell it when it gets back to a certain value,” he says. Because rebalancing is an ongoing, systematic process, it takes the nonproductive guesswork out.

7. Counting on Uncle Sam for retirement. 

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Some investors may put off retirement investing, thinking Social Security will make up the difference. “They should know that Social Security will only cover 10 to 30 percent of retirement living expenses,” says Edward Kohlhepp, an independent financial advisor in Doylestown, Pennsylvania. People who don’t hit on this at the right time “often start investing with too little, too late,” Kohlhepp says.

8. Letting your bad behavior get in the way. 

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Some investors might blame the market or rotten luck when they’re responsible. “Ultimately it’s our own behavior that does us in,” says Peter Mallouk, author of “The 5 Mistakes Every Investor Makes and How to Avoid Them.” “The key to dodging the pitfall is to be aware of what your instincts tell you and recognize behavioral land mines.” These include overconfidence and succumbing to herding mentality.

9. Assuming retirement equals a lower tax bracket. 

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Retirees ready to thumb their noses at the Internal Revenue Service might be in for a rude awakening, says Dave Henderson, a financial planner based in Greenwood Village, Colorado. “Many times when people get to retirement, they have paid off their mortgage, their kids are out on their own and they are no longer contributing to deductible retirement plans,” he says. But between pension plans, withdrawals from retirement accounts and partial taxation of Social Security, “their income may not be much lower, and they have very few things to deduct, resulting in higher taxation than they planned for.”

10. Assuming your advisor is a legal fiduciary. 

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In investment, legal fiduciaries act solely in the investor’s interests. And while only a small percentage of financial advisors have a legal fiduciary relationship with clients, “most investors believe their relationship includes a fiduciary duty,” says George H. Walper Jr., president of Spectrem Group in Chicago. “This disconnect could lead to major conflict between the investor and the advisor if the reality does not match the expectation.”

Written by Lou Carlozo of U.S. News & World Report

(Source: U.S. News & World Report)