Warren Buffett on investment mistakes | Smart Switch: Personal Finance

(Catherine Brock)

You can find a lot of information online on how to avoid investment mistakes. What you’ll find less of is real talk about the inevitability of investment mishaps.

If you are buying financial assets, you will go wrong here and there. You may choose the wrong stock or fund. You may invest too much. You may get too excited about stocks and forget to balance your risk with fixed income.

You can learn to work around some of these mistakes, but not all of them. To back up that claim, I’ll enlist the help of famed investor Warren Buffet, also known as the Oracle of Omaha. In his 2021 letter to Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) shareholders, Buffett said, “I make a lot of mistakes.”

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Buffett’s admission came as he described the range of performance trends among Berkshire Hathaway’s assets. Some of the conglomerate’s businesses are doing very well, some are doing fairly well, and some are “marginal.”

Image source: Getty Images.

If Buffett is doing investment mistakes, then all investors are. We cannot avoid them. What we can do is manage the impact of those mistakes, financially and emotionally. Here are four strategies to help you.

1. Diversify across asset classes

Investments are grouped into asset classes, or categories that have similar behaviors and risk/reward characteristics. Stocks are an asset class. Bonds, cash, and real estate are also asset classes.

Stocks are high growth potential but also high volatility. Bonds produce stable income but don’t appreciate like stocks do.

When you hold stocks and bonds together, you have elements of growth and stability. To some extent, you can tailor the behavior of your portfolio by holding more or less of each asset class. If growth is more important to you, you would have a high percentage of shares. If you prefer lower growth in favor of stability, you would have more bonds.

Diversifying in real estate, cryptocurrencyand other alternative assets can provide growth that is less dependent on stock market cycles.

2. Diversify within asset classes

To diversify Within an asset class, you would have multiple stocks, multiple bonds, or multiple cryptocurrencies, for example.

For stocks, the general rule of thumb is to own 20 to 25 different companies, spread across multiple economic sectors, such as technology, utilities, or finance. You can do this by selecting stocks or by investing in one or more diversified funds.

3. Commit to investing for the long term

Diversification minimizes the effects of choosing the wrong security. Similarly, committing to a long-term investment habit protects you from another common investor mistake: not timing the market.

Having a long-term focus it is advantageous because the stock market is more predictable over longer periods of time. Stocks can be volatile from year to year, but they generally tend to rise for 10 years or more. For 20 years, the US stock market has always been trending up.

In other words, the easiest way to make money as an investor is to choose quality companies and stay invested in them for decades. After 10 years or more, any ill-timed purchases will often be irrelevant. After 20 years, you are much more likely to have unrealized gains in your portfolio than unrealized losses.

4. Let it go

If you make a mistake in timing or security selection, find a way to let it slide. Don’t keep score and don’t try to recoup losses quickly. You can learn about what happened to identify lessons or process improvements that can help you. Beyond that, worrying about a mistake is not productive.

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Buffett and others famous investors make mistakes, and you will too. Plan for slips by diversifying and focusing on long-term results. And when you hit an obstacle, absorb the blow and keep going. There will be more money to win another day.

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catherine brock has no position in any of the mentioned stocks. The Motley Fool owns and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: Long $200 January 2023 Call Options on Berkshire Hathaway (B-Shares), Short $200 January 2023 Put Options on Berkshire Hathaway (B-Shares) and Short $265 Call Options in January 2023 in Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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