4 TIPS FROM 3 LEGENDARY INVESTORS TO BUILD LONG-TERM WEALTH
Did you know that Alia offers a free, online financial literacy course?
It provides an overview of business concepts and investment principles, including Warren Buffett’s “secret sauce” for investing.
Which brings me to today’s blog…
Warren Buffett and other well-known investors, like Charley Ellis and Carlos Slim Helú, embrace the power of long-term investing, or the idea of spending time in the market rather than trying to time its ups and downs for potentially higher rewards.
Buffett has a way with words when describing this strategy and reflecting on the value of patience and commitment:
“Someone is sitting in the shade today because someone planted a tree long time ago.”
Here are four fundamental truths to maximize the power of your long-term investing strategy.
1. Know When the Money Will Be Spent
That’s one of the most important questions when investing, as far as legendary investor Charley Ellis is concerned.
Define your long-term investment goals—your why, or purpose, and when you’ll need the money.
Is your goal to build a comfortable retirement 30 years down the road or to finance a new house in a couple of years? To create a sizable nest egg for you and your heirs or to fund a gift to charity? It’s likely not going to be an “either/or” situation but rather an “and”—to retire comfortably and build a new home; a nest egg and a gift to charity.
It’s vital that you prioritize investment goals and develop a plan that facilitates growth within your anticipated time frames, so you have the funds for all the “ands” you’ve dreamed of achieving.
“If it’s (the investment) going to be spent in the next two or three years, then the right way to invest is treasury bills, because you can’t afford to take any risk of markets surprising you,” Ellis says. “If it’s going to be five to seven years, you might use mostly bonds.
“By the time you get out to 10 years or longer you probably ought to be almost entirely in equities. …”
2. Be true to you.
A key investing theme: Know thyself.
“What riskiness can you live with and live through? Can you hang on when the pressure is most intense and the data most compelling that you are clearly wrong? If not, recognize your own emotional realities and learn to live well within them.”
—Charley Ellis
Are you more risk averse or risk tolerant? Do short-term portfolio losses have you wringing your hands? Remember this: Long-term investing is less affected by short-term market fluctuations and offers more time for recovery in case of a downturn.
3. Let the money do its work.
There’s an old saying in our business that investors should set on speed dial. “It’s all about time in the market, not timing the market.”
Market timing and chasing investment returns generally don’t get you very far in terms of generating long-term wealth. In fact, many financial advisors say that trying to time the market is the most common investment mistake they see among prospective and new clients.
Instead, seek investment opportunities that will grow moderately over the long term. By long term, I mean 40, 50, even 60 years. While this seems like an extraordinarily long time, consider that most young people get into the stock market in their 20s, at their first job and with their first 401k. Perhaps this is your story too. This means you have well over 40 years to let your money do the work.
“Courage taught me no matter how bad a crisis gets ... any sound investment will eventually pay off.”
—Carlos Slim Helú, Mexican business magnate, investor and philanthropist
Stay strong, steady and disciplined.
Don't despair when inevitable setbacks occur, especially during a market crisis. If the reasoning behind the investment is sound, it should eventually turn around.
4. Stay cool through the fire.
In other words, don’t let short-term volatility scare you. As a long-term investor, look to your portfolio’s larger story and its overall performance. Avoid getting stuck in the volatility and stress of stock movement, up or down, over a shorter time period, such as a day, week, or months.
“Our favorite holding period is forever.”
His affinity for long-term investing springs from the principle of compound interest. Compounding increases the value of the money you have invested by putting the interest earned from an investment back into the principal. This recirculating of gains back into the original principal generates even larger earnings in the long run.
His authorized autobiography, The Snowball: Warren Buffett and the Business of Life, hints at this magical mix of time and compound interest to create wealth. Buffett has said, “Life is like a snowball. The important thing is finding wet snow and a really long hill.”
Feel free to learn more about the power of long-term investing; we strongly encourage it. Check out our complimentary financial literacy course or contact us today to arrange to meet.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
