Set Your Retirement Savings On ‘Snowball’

Posted on September 5, 2014 at 2:06 PM PDT by

Warren Buffett, the billionaire investor, recently had a biography published entitled The Snowball: Warren Buffet and the Business of LifeThe metaphorical title could not be a more apt description of Buffett’s financial philosophy, and you can put that same philosophy to work for your retirement savings.

For Buffett, investing is simple: Buy low — very low — and sell only when you can put the money to better use elsewhere. That way, he has held onto some stocks for decades, collecting dividends and enjoying many stock splits over time.

retirement savings

Investing for him is less about picking a company as it is about picking a long-lasting and entrenched business model, one that will grow and compound your money into more money. To quote Buffett himself, “Life is like a snowball. The important thing is finding wet snow and a really long hill.”

How can you find that really long hill? One way is to buy great companies. But stock picking is very hard, increasingly too hard for most people. Even Buffett advises against it. Famously, he told his lawyers to put in his will that his heirs should buy index funds rather than own individual stocks.

The reason he likes index funds is that they are inexpensive to own and they give you exposure to that really long hill of wet snow. A broadly diversified index fund in a portfolio of index funds cannot help but grow over time as it rebalances itself internally, reinvesting your retirement savings gains nonstop.

Likewise, Buffett often talks about the advantages of correctly allocating capital. He has made a science of doing so, but an ordinary retirement investor can get much the same effect just by rebalancing among asset classes.

An edge on stocks

Rather than choose which investments will go up in the future, one simply sells off the gainers and uses the resulting cash to buy investments that have fallen in comparison. That action alone would have given retirement investors a 1.5% edge over the stock market alone over the past 15 years, according to the research.

A 1.5% edge on stocks is a pretty good sized snowball, even before it begins to roll. To that, one need add only time. Staying in markets as they rise and fall is the key to realizing the gains that come from patience and wet snow.

You might not end up a multi-billionaire like Buffett, but if you save diligently and keep your investing costs minimized, you can retirement comfortably.