Investment Planning: First Things First
Smart investing starts with a plan. Learn why asset allocation, not stock picking, drives long-term portfolio performance.
Author: Matthew Williams CFP®, RICP®, CEXP®, CASL®, AEP® | Director of Financial Planning at Impact Advisors Group
Born in 1930, Warren Buffett’s foray into the stock market began at the age of 11 when he purchased three shares of Cities Service for $38 each, according to CNBC. The stock briefly dipped, then rebounded to $40. He sold and booked a small profit.
After the sale, young Warren stood on the sidelines as he watched the stock surge, teaching him a crucial early lesson about the importance of patience and the difficulties investors encounter when deciding the right moments to buy and sell a stock.
At Berkshire Hathaway’s annual meeting this past May, Warren Buffett announced he will be stepping down as CEO at the end of the year but will remain as chairman of the board.
“I’m not going to sit at home and watch soap operas,” he jokingly said, but he also acknowledged that he has slowed down and shared with The Wall Street Journal how much energy his appointed successor brings to the table.
At 94, Buffett said, “There was no magic moment. How do you know the day that you become old?”
His thoughtful approach to succession and recognition that now may be the right time to step aside offers us valuable leadership lessons.
The legendary investor has often preached the importance of long-term investing. Widely known as the “Oracle of Omaha,” Buffett has long advocated patience and long-term investing over what he deems as riskier strategies, such as the glamor of day trading and the illusion of control that it generates.
“There’s a temptation for people to act far too frequently in stocks simply because they’re so liquid.” Instead, “The main thing to do is just buy into a wonderful business and just sit there with it.”
Buffett believes in buying high-quality companies and holding them for years, even decades. His famous quote, “Our favorite holding period is forever,” reflects a core principle rather than a philosophy that focuses on chasing short-term gains.
Put another way, “If you aren’t willing to own a stock for 10 years,” he said, “Don’t even think about owning it for 10 minutes.”
Broadly speaking, his focus is on individual investments, and he has an enviable long-term record, but his principles are timeless, and the wisdom he has accumulated over the decades can benefit both large and smaller investors.
As Buffett wisely observed, “The stock market is designed to transfer money from the active to the patient.”
His track record and achievements speak for themselves, offering a powerful testament to his enduring success.
He proudly highlights his returns in his annual letter to shareholders.
Since 1965, Berkshire has provided an annual compounded return of 19.9% versus a still solid 10.4% for the S&P 500 Index (through 2024). Put another way, that is a 5.5 million percent return compared to 39,000% for the S&P 500.
Yet, while we may marvel at his returns over the last 60 years, let’s acknowledge that the widely quoted S&P 500 Index demonstrates a critical advantage of having a well-diversified portfolio for building wealth.
Warren Buffett’s philosophy on financial planning revolves around simplicity, patience, and discipline. As we have said, his approach prioritizes consistency over chasing quick profits.
Let’s review some of his key principles and how we incorporate his long-term approach.
1. Invest in what you understand. Stick to your circle of competence by focusing on industries, companies, funds, and exchange-traded funds (EFTs) you truly understand. This reduces the likelihood of mistakes in areas where your knowledge is more limited. Further, it enhances decision-making confidence.
2. Don’t get caught up in daily headlines and market volatility. Investing that feeds off emotions poses a risk to your financial goals. For example, exiting stocks during a steep market selloff usually lacks a foundation in logical reasoning and is often instigated by fear, doubt, and a tendency to follow the crowd.
Buffett views market fluctuations as an opportunity to exploit rather than something to fear.
Rather than reacting to short-term stock price movements, stay focused on the long-term fundamentals. Well-diversified portfolios tap into the long-term potential that the American economy has to offer.
Historically, the strength of the U.S. stock market has reflected the consistent growth of the broader economy. While we cannot predict how the stock market will perform in the next week, month, or even next year, its long-term track record is compelling.
Put simply, a growing economy lifts corporate profits. While the relationship is not perfectly linear, patience has been a virtue as rising stock prices have historically reflected this upward trend in corporate earnings.
3. Stay the course. This principle aligns with the tenet above. One of Buffett’s key principles is emotional discipline—remaining committed to a long-term strategy despite market volatility. He warns against panic-driven selling and trend-chasing, encouraging rational patient investing.
Time and time again, he has downplayed market volatility.
After a steep selloff, the primary market indexes have regained a significant portion of the losses incurred during the decline in early April.
While we advise against making investment decisions solely based on market movements, if the volatility in early April caused any concerns, we’d be happy to discuss it with you.
4. Harness the power of compounding. By reinvesting dividends, investors can significantly grow their portfolios over time. Buffett credits compound interest as a major factor behind his wealth.
5. Minimize unnecessary fees and costs. Our recommendations are thoughtfully tailored to your unique goals and circumstances. That said, low-cost index funds remain one of the most effective tools for building long-term wealth. They offer investors, both large and small, efficient, broad-based access to the market with minimal cost and complexity.
In his letter last year to shareholders, Buffett was direct and unwavering in his perspective:
“I can’t remember a period since March 11, 1942—the date of my first stock purchase—that I have not had a majority of my net worth in equities, U.S.-based equities. And so far, so good,” he said.
Reflecting on his earliest investment, he recalled, “The Dow Jones Industrial Average fell below 100 on that fateful day in 1942 when I pulled the trigger (purchased my first investment) … America has been a terrific country for investors.”
In his letter in 2023 he included a poignant observation: “America would have done fine without Berkshire. The reverse is not true.”
Smart investing starts with a plan. Learn why asset allocation, not stock picking, drives long-term portfolio performance.
80% of a company’s results are often created by 20% of their team, but what happens when those key employees leave?
IAG is proud to announce that Matthew Williams has been awarded the Accredited Estate Planner® (AEP®) designation.
Many find fulfillment in their work and plan to continue their careers well into their 70s and even beyond.