For many people, retirement is a long-awaited goal that’s achievable due to consistently saving and investing. But a few poor investment decisions as you near your Golden Years can put a damper on your retirement dreams.
Legendary investor and Berkshire Hathaway chairman Warren Buffett warns against a particular mistake that could be detrimental to your nest egg: emotional investing. Instead, he says to invest in reliable companies and let logic dictate your decisions.
Leave emotions out of investing
As the adage goes, time in the stock market beats timing the market. But it’s easy to forget that when the market experiences a downturn and your portfolio drops 20%. It may be tempting to panic sell — especially if you are retired and need your nest egg to keep up with your cost of living — but doing so means locking in losses. Selling when stocks are down means you’ll miss out on returns from a market recovery.
Staying calm when others act on emotions can set you up better for market upswings and give your retirement portfolio more time to grow. To be clear, it’s appropriate to sell stocks to fund your retirement needs, but only if doing so is part of your overall plan.
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Why emotional investing can hurt more after age 60
Emotional investing is costly for any investor, but it can be especially harmful to people in their 60s and beyond. That’s because the time horizon for your goals is shorter than it was earlier in life.
As a result, your assets have less time to recover from a downturn, since you may need to tap your nest egg in the short term to cover your essentials. Plus, your money has less time to compound.
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Buffett’s playbook for late-life stability
Buffett has offered a lot of advice over the years for people who want to avoid emotional investing and build a financial foundation with an emphasis on stability. The first step is making sure you have enough cash reserves to cover your living expenses. Buffett is known for having a large cash position so he can capitalize on buying opportunities. Many experts recommend that retirees keep enough cash on hand to cover one to two years’ worth of their living expenses.
But while retirees’ portfolios may include a significant amount of cash and bonds, it’s also important for their portfolio to keep growing. Buffett recommends investing in quality companies with strong financials and competitive moats — not investing based on a fear of missing out. Buying the latest flashy investments can be extremely risky for retirees.
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Buffett has also emphasized the need to be patient with your investments. Keep in mind that money you put into the stock market should be money you won’t need in the short term.
Consistency and stability are the hallmarks of a retirement portfolio that gives you enough cash to enjoy your golden years. Staying calm during downturns is more valuable than chasing dramatic stock price movements or following the herd toward growth stocks. Buffett built wealth that can last for multiple generations by following these principles, and you can use these same concepts to strengthen your finances.
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