Warren Buffett is one of the most successful investors of all time. His long-term success, consistent returns, and timeless advice have inspired millions of investors. But while many of his investing principles are sound, they aren’t always suitable for everyday investors.
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GOBankingRates spoke to financial planners to share Buffett’s investing tips to take with a grain of salt. Here’s where they recommend taking Buffett’s advice with caution and why your financial plan may need a different approach.
‘Never Invest in a Business You Cannot Understand’
This sounds like no-brainer advice. But here’s what many people miss: Buffett’s investment decisions come from extensive due diligence, something that everyday investors don’t have the time and tools to replicate.
“While it sounds like common sense, the challenge is that Buffett has access to deep research, management insights, and analytical resources that most individuals simply don’t,” said Eric Blake, founder of Blake Wealth Management. “The average investor doesn’t have the time or tools to analyze a company’s balance sheet, competitive moat or management quality in the way Buffett does.”
‘It’s Far Better To Buy a Wonderful Company at a Fair Price Than a Fair Company at a Wonderful Price’
Buffett’s focus on quality makes sense. But again, identifying “wonderful” companies requires deep research and a strong understanding of the stock market.
Most average investors don’t have the time and experience to value companies. Trying to replicate Buffett’s advice could lead to costly mistakes. For this reason, index funds often make more sense.
“That’s why many of our clients — especially women who are retired, divorced, or widowed — should likely prioritize simplicity, transparency, and diversification through professionally managed portfolios and index-based strategies over picking individual stocks,” added Blake.
‘Just Do Index Funds’
Even Buffett’s most democratized advice, “just do index funds,” needs careful consideration.
“Many people cannot handle the volatility associated with the S&P 500 index,” said Jeremy Finger, founder of Riverbend Wealth Management. “I was down 55%-plus in the 2008-’09 crash. Down 49% in 2000-2002. Down markets can be especially devastating if you are withdrawing money for retirement.”
“Not everyone has the emotional investing stability that Mr. Buffett has. Even if they think they do, many sell when it is down and hope to get back in later.” This emotional selling destroys long-term returns faster than any market crash.
‘Only Buy Something That You’d Be Perfectly Happy To Hold If the Market Shut Down for 10 Years’
While investors should always think long-term, not everyone can afford to wait a decade to see returns. “Most of our clients can’t afford to think in purely decades-long terms when they also have short-term spending needs or rely on their portfolio for retirement income,” Blake added.
This is why many financial planners apply the “5-year rule.” If you’ll need to spend the money within the next five years, it probably doesn’t belong in the stock market.
“Buffett’s advice is powerful, but context always matters. What works for a legendary investor managing billions with a 100-year view isn’t always what works for someone planning the next 20-30 years of retirement, especially when that income needs to be reliable, tax-efficient and personalized,” Blake noted.
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This article originally appeared on GOBankingRates.com: Financial Planners Share 4 Warren Buffett Tips To Take With a Grain of Salt
