You might admire him, but you don’t need to follow his lead.
Warren Buffett didn’t get to be a billionaire by accident. The investing legend spent his lifetime making savvy financial decisions that got him to where he is today.
It’s natural to look up to someone like Buffett — and tell yourself you’ll try to emulate his strategy to set yourself up with a sweet retirement nest egg. But you may not want to follow Buffett’s lead in that regard. And that’s something Buffett would probably tell you himself. Here’s why.
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1. You may not have the same stock-picking knowledge
Buffett has clearly done an excellent job of assembling an investment portfolio that’s worked wonders for him. But do you have that level of knowledge?
If you don’t, you’re not alone. First of all, even seasoned investors make their share of bad calls. And if you’re also someone who finds the idea of hand-picking stocks daunting, then you may not want to put your life savings on the line by choosing specific stocks for your retirement portfolio.
The good news, though, is that you don’t have to. Even Buffett himself says that for the typical, everyday investor, putting money into an S&P 500 index fund over time is a great way to grow wealth.
The nice thing about going this route is taking the guesswork out of investing. You don’t have to research stocks individually, and you don’t have to worry about a single company you own tanking and dragging your portfolio down with it.
Plus, because index funds are passively managed, you shouldn’t be looking at costly fees that eat away at your returns. If you’re saving for retirement in a 401(k) plan, before you put your money into one of its mutual funds with high fees (known as expense ratios), see if there’s an S&P 500 index fund to choose instead.
2. You don’t have the same level of assets
The more wealth you have, the more you can afford to take a little risk. And as a billionaire, it stands to reason that Buffett’s risk profile may — and should — look different than yours.
Say you’ve saved $200,000 for retirement. If you take a chance on a riskier investment and lose $10,000, that’s 5% of your portfolio, which isn’t a negligible amount. If Buffett were to lose $10,000, it wouldn’t make any difference to his finances.
That’s another reason it pays to fall back on an S&P 500 index fund for your retirement savings. Because you’re putting your money into such a diverse mix of companies, and because those companies are likely established businesses (otherwise they probably wouldn’t be in the S&P 500), you may be taking on an amount of risk that’s optimal for your situation.
It’s OK to admire Warren Buffett for the wealth he’s accumulated through the years. But that doesn’t mean you have to invest the same way he does. And if you want a way to grow a lot of retirement wealth without doing too much work or taking on undue risk, then you may want to put your money into the S&P 500 and call it a day.