Warren Buffett is one of the most successful investors of our time, so it pays to heed his advice on building wealth. Here are three moves Buffett has long advocated that it pays to incorporate into your personal investing strategy.
1. Buy what you know
If you're going to hand pick stocks for your portfolio, it's important to choose them wisely. But if you don't understand how a company makes money or what edge it has over its competition, then you're not doing a very good job of vetting your investments. Buffett has long believed that you should buy up companies whose business models you understand and believe in, and it's a good practice whether you're new to investing or have been at it for years.
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2. Hold stocks a long time
Perhaps one of Buffett's most famous quotes is "if you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." The buy and hold strategy is a good one to employ, provided you're loading up on quality stocks that you've thoroughly vetted. Investors who try to make a quick buck in the stock market tend to get burned, but if you take a more patient, long-term approach, you're more likely to come out ahead.
Incidentally, Buffett's strategy can benefit you from a tax perspective, too. When you sell stocks for more than what you paid for them initially, you're subject to capital gains taxes. Short-term capital gains -- those applied to investments that are held for a year or less -- are taxed at the same rate as ordinary income, whereas long term capital gains -- those applied to investments that are held for at least a year and a day -- are taxed at a much lower rate across all income levels.
3. Rely on index funds to build a portfolio
Researching individual stocks takes work, and even if you put in the time, you may end up with some underperformers in your portfolio anyway. That's why Buffett is such a big fan of index funds for the average investor.
Index funds are passively managed funds that aim to match the performance of the market indexes they're tied to. An S&P 500 index fund, for example, will aim to mimic the performance of the S&P 500 itself. The beauty of index funds is that you get a bucket of stocks in a single purchase, which lends to a well-diversified portfolio. And index funds don't require a lot of research, so they're a good bet if you're new to investing or just aren't confident in your ability to choose stocks one by one.
Take advice from one of the greats
Warren Buffett isn't infallible, but when it comes to investing, he certainly knows a thing or two. While you may never achieve the same level of wealth as Buffett himself, you can do quite well for yourself if you take his advice to heart and follow these simple rules when building your personal portfolio.
