Warren Buffett, the billionaire investing guru and chairman of Berkshire Hathaway, has this piece of advice for you: Calm down already. As with most Buffett investment advice, it takes some doing.
For instance, here are a few recent headlines from the investing news world. See if you can get through them without putting your head down on your desk in despair:
Pretty harrowing stuff, right? Each headline is written to convey a simple message. Specifically, if you read the story that follows, you will learn something from the effort. As is always the problem with investment news, what you really need to know is: How do I invest now?
It’s hard to blame the folks writing the headlines. They have a dual task, neither of which is to give you advice. They must credibly explain what’s going on and, secondly, try to give you a reason to click on their headline, as opposed to the hundreds of other links that whiz by in a few minutes of Internet surfing.
Such as they are, headlines have a job, which is to stand out above the noise. At minimum, the idea is to get you to click and draw you into a narrative. “Yen edges toward brink” is a headline. “Yen monthly average within pennies of annual average compared to dollar,” which is actually true, is not.
Even if you do learn something earthshaking about the world from a news report, chances are about zero that you will learn fast enough to make an investing decision. After all, the definition of news is “facts a small number of people have long known and which are now exposed to the larger public.” The small number who know what’s what already made the relevant trade, probably a long time ago.
Buffett investment advice often centers on the idea that he invests as if the stock market were set to close for years. He’s utterly uninterested in what the mass of investors believes about his holdings, nor does Buffett care much about the price of his public stocks day-to-day.
The key Buffett investment advice is not even about being “smart.” It’s about sticking to your guns. He told investors in Berkshire a few years back: “If you are in the investment business and have an I.Q. of 150, sell 30 points to someone else. What you need instead is an emotional stability and inner peace about your decisions.”
The trouble for most of us, of course, is that we find it impossible to choose between paying no attention and paying constant attention. Paying no attention seems like an invitation to disaster. So we compromise and pay some attention, snatching up rapid bites of data and news about our investments as they appear, hoping to stay informed.
The cumulative effect of this style of news consumption is heartburn. We know enough to be worried. Things get better and we worry that we should sell and protect gains. Things get worse and we hold on, hoping for a turn upward.
The research shows that investors thus neglect making choices until they are forced to do so. Then they make poor choices, selling out at market bottoms and, too often, missing the rebounds that follow.
Getting to an Buffett investment advice nirvana would be equal measures of being able to ignore market news yet stay informed enough to make concrete choices when it matters most. And that’s what rebalancing and asset allocation is all about.
Imagine getting these headlines instead:
Feel like you could act on those headlines? Then you’re ready to try passive investing using ETFs (not coincidentally, a key piece of Buffett investment advice is that most people should invest passively). Based on the above (fictitious) headlines, you might consider allocations of Vanguard MSCI Emerging Markets Stock ETF (VWO), Vanguard Total Stock Market ETF (VTI), Vanguard Total Bond Market ETF (BND), and SPDR Gold Trust (GLD).
Passive ETFs, combined with the wealth-building power of a personal asset allocation and disciplined rebalancing plan, can give you a lot of inner peace, the one piece of Buffett investment advice you need most to succeed.