With the stock market at all-time highs, and political, economic, and interest-rate uncertainty making many investors uneasy, it's important to take a step back and remain objective. Few investors have done a better job of navigating uncertain times than Berkshire Hathaway (BRK.A -1.05%) (BRK.B -0.59%) CEO Warren Buffett, and here are three pieces of Buffett wisdom that may help you keep things in perspective and improve your financial health.
Don't stop investing in America, no matter who's in charge
After the November election, but before President Donald Trump took office, Buffett was asked in a CNBC interview about his expectations for the stock market under the Trump administration. Buffett was an outspoken Hillary Clinton supporter, so many people thought the Oracle of Omaha might be worried about his investments.
Buffett simply replied, "Never bet against America."
In other words, if you're investing for the long term, keep the long term in mind. And over the long run, investors couldn't be in better shape. "America works ... I've said this before, it'll work wonderfully under Hillary Clinton, and I think it'll work fine under Donald Trump," Buffett said. Buffett also pointed out at Berkshire's most recent annual meeting that the company and its long-term-focused investment strategy have done just fine in a variety of political and economic climates over the past 50 years.
The takeaway is that it would be a mistake to sell your investments and keep cash on the sidelines, or stop contributing to your brokerage accounts, simply because of short-term political uncertainty. Just keep your eye on the long term, and if the stock market does happen to crash, you should look at it as an opportunity to find bargains, not as a reason to panic.
Picking stocks is not for everyone
Even though Buffett has a positive long-term outlook on American business, that doesn't mean the average American should start picking stocks to buy. Quite the opposite, actually.
Buffett has said on several occasions that the best investment most people can make is a basic, low-cost S&P 500 index fund, like the one he used in his $500,000 bet to outperform a basket of hedge funds. Buffett has specifically referenced Vanguard's product, and the Vanguard S&P 500 ETF (VOO -1.25%) is highly accessible and affordable to average investors, charging a rock-bottom 0.04% expense ratio. Buffett has even gone so far as to say that he'd like his wife to invest in such a fund after he's gone -- not Berkshire stock.
The basic idea is that the average American doesn't have the time, desire, or knowledge to properly evaluate stocks, and to monitor and maintain a properly diversified portfolio on an ongoing basis. If you do, we encourage you to do it. Rather, the point is that for the average American -- who invests primarily in mutual funds, not individual stocks -- index fund investing is the smartest way to go.
It's no secret that most actively managed funds don't beat the market. Conversely, an S&P 500 index fund will, by definition, match the stock market's performance. Over long periods of time, the S&P 500 has averaged total returns in the 9%-10% range. To put this kind of performance into perspective, let's say you invest $5,000 in an S&P 500 index fund for 30 years, so $150,000 total. If your investment grows by 9% per year, on average, you'd have more than $680,000, thanks to the power of compound returns.
Don't underestimate the importance of keeping some cash handy
Over the years, Berkshire Hathaway has done a great job at outperforming the market during recessions and crashes, and then coming out of them in even better shape that before. One major reason is that Buffett understands the value of keeping an "emergency fund."
As Buffett has said, "Cash is to a business as oxygen is to an individual: never thought about when it is present; the only thing in mind when it is absent."
While Buffett's minimum emergency fund of $20 billion is on an entirely different scale from what you need, the same logic applies to everyday Americans. About half of Americans can't cover an unexpected $400 expense without borrowing the money or selling something. For investors, this could lead to costly credit card debt that eats away at your wallet, or the need to sell investments that you'd be better off keeping for the long term.
The amount of emergency cash you need varies depending on your personal situation, but you may be surprised at how much of an impact that a seemingly small stockpile of cash could have on your overall financial health.