Caught in an extraordinary convergence of unhinged stock market volatility and historically low interest rates on savings, many people are rethinking their plans and their vision for the future, especially as they consider the prospect of having to stretch their retirement income over 25 or 30 years. A study conducted in 2015 by the Employee Benefit Research Institute found workers of all ages are continuing to lose confidence in their ability to afford a comfortable retirement. But instead of adjusting their investment strategies to confront the challenge, many are simply retreating into a “winning by not losing” mentality and avoiding the stock market altogether. That can be the biggest mistake anyone can make in their retirement planning.
Turning to a man who knows a little something about winning by not losing, everyone can learn some valuable lessons from Warren Buffett, arguably the most successful investor of all time. Buffett has two strict rules about investing that anyone would find, well, frustratingly simplistic. The first – “don’t lose money,” and the second – “don’t forget rule number one.” But for Buffett, winning can only happen in the stock market. Obviously, when your money sits in low yielding savings accounts it is impossible to win. In fact, if your money is earning below two percent interest, you lose each day to inflation. Over a twenty year period, your dollars are worth just a fraction of what they were.
What Does Buffett Know that We Don’t?
Over time, Warren Buffett has graciously imparted bits and pieces of his knowledge, and for those who really paid attention, they have managed to gain many of the advantages of his practices. See, Buffett adheres to history and he doesn’t fight the facts, while average investors tend to let their emotions guide their decisions. Buffett will be the first to tell you that emotions and investing don’t mix.
- Fact #1: Bear markets do happen – but then, so do bull markets
- Fact #2: The average duration of a bear market is 11 months as compared to 32 months for a bull market
- Fact #3: The average bear market decline is 27 percent; the average bull market gain is 119 percent
- Fact #4: Since WWII there has been as many bear markets as there have been bull markets, yet the stock market has still managed to advance more than 100-fold.
The takeaway for investors is that the losses of the bear markets have only been temporary while the gains of the bull markets are permanent. With each bull market, the losses of the preceeding bear market decline were made up and the gains of the prior bull market were extended. In that perspective, bear markets are nothing more than a temporary interruption of a longer term uptrend. So, the real risk is not in the next market decline of 27 percent; the real risk is not being in the next 100 percent market increase.
Not everyone has the courage or the patience (or the billions) that Buffett has to stay fully invested in the stock market, yet constant exposure to equities is vital if you are to have any chance of a secure retirement. Most investors can’t pick individual stocks like Buffett either, nor should they try. Buffett has a fully diversified portfolio of stocks invested across many industries, global regions and asset classes. You can achieve the same diversification with index funds or exchange-traded funds with the ability to allocate your assets broadly to reduce risk and volatility. Then, if you can exercise the same level of discipline and patience as Buffett, you can simply let the stock market do all the work.