When it comes to the world's most renowned investors, there are few who take precedence over Warren Buffett.
Buffett entered the investment world with a mere $9,800 after graduating college but grew that sum to $127,000 by 1955. Instead of sitting on his laurels and retiring after a quick boost from his initial investment, Buffett continued to invest and has grown his fortune to $67 billion as of the end of September, per Forbes.You might call that one of the best retirement funds in existence.
But what makes Warren Buffett successful isn't necessarily a secret. It's a strategy many investors have also employed, including Vanguard founder John Bogle, value investing pioneer Benjamin Graham, and even Buffett's partner in crime, Charlie Munger.
Let's have a look at three key aspects of their investment plans and see how you can apply them to you own financial situation.
No. 1: Diligent saving
To begin with, Warren Buffett and a number of the world's most successful investors were good savers. This doesn't mean they squirreled away every penny they made and put it under the mattress, but rather they adhered to a budget that involved keeping track of how much they spent and how much they saved after their expenses. And, most importantly, they were able to do this at a fairly young age.
This last point is particularly important, because time is the greatest ally of investors. The earlier you can start saving and investing, the greater your chances are of compounding those gains over the long run.
In The Snowball: Warren Buffett and the Business of Life, Warren Buffett's biographer, Alice Schroder, noted that at just age 11, Buffett read a passage from a book entitled One Thousand Ways to Make $1,000 and was able to imagine how that $1,000, like a snowball gathering size rolling down a hill, could compound over time. From that point on, he was obsessed with investing and reinvesting what money he could save.
Yet most Americans are actually terrible savers, primarily because a majority were never taught practical money-management skills in high school or college. In fact, a poll conducted by Sallie Mae a few years ago found that 84% of high school students want more financial-management education. From this nation's low savings rates to its high consumer debt, the perils of financial illiteracy are everywhere.
The solution to this problem is twofold. We need financial education taught early on in our schools so Americans understand the importance of saving. Meanwhile, today's adults need to take a more proactive role when it comes to their finances.
The most important thing people can do is create, and adhere to, a budget, because the more they can reasonably save, the more they'll be able to invest in their future. If you aren't comfortable with their current level of financial knowledge, there are a number of ways to address this. Computer software, for example, can walk a person through creating a budget, as can a financial advisor. And for the do-it-yourself crowd, The Motley Fool will happily help you understand the ins and outs of investing for your future.
No. 2: Diverse investments and income streams
I'm not going to lie: It's a lot easier to diversify your investment income when you're working with hundreds of millions, if not billions, of dollars. But the fact is not lost that Buffett, Bogle, and many other successful investors over time have preached the importance of diversification.
What investors need to understand is that the best retirement plans offer two variances of diversification.
The first involves the type of companies you buy in your investment portfolio. Most of you have probably heard the adage about putting all your eggs in one basket. Throwing most or all of your money in a single investment or stock could leave you hurting if that investment goes south. Instead, you should spread your wealth over a number of stocks and industries, with the goal being to give yourself the best chance to hit a home run. Remember, not every investment has to be a winner so long as you find a few big gainers from time to time and stick with those winners over the long run.
But diversification also matters outside the stock market. It means giving yourself the best chance to succeed with a number of other tools at your disposal. For example, a tax-advantaged Roth IRA allows you to contribute up to $5,500 in 2014 (or $6,500 if you're 50 or older) and invest that money while never paying another cent in tax on the gains so long as you make no unauthorized withdrawals. Keep in mind there are income limits on IRA contributions, so you'll need to see if you qualify.
In addition to IRAs, many employers offer their employees 401(k)s, which are also tax-advantaged and often come with matching contributions from the employer -- that's free money! Self-employed persons can also set up retirement plans for themselves, ranging from 401(k)s to simplified employee pensions.
Finally, consider the impact that Social Security will have on your income later in life. Delaying benefits until age 70 can net you 76% more than you would receive by taking your benefits at age 62. By diligently saving and investing, you may be able to comfortably live off your retirement nest egg until you hit age 70 so as to maximize your Social Security benefits. However, every individual's financial situation will be unique, and some retirees need the supplemental income that Social Security provides as soon as possible.
No. 3: Focusing on the long term and ignoring the white noise
Lastly, the world's top investors all share the trait of being long-term-focused.
The best investment strategies rely on compounding gains and time to build wealth. It's crucial to stay invested and let compound interest work for you, rather than moving in and out of stocks in an attempt to time the market. In fact, trying to time the market can wind up being disastrous. According to J.P. Morgan Asset Management, using data collected from Lipper on the S&P 500 between Dec. 31, 1993 and Dec. 31, 2013, missing the 30 best trading days in that roughly 7,300-day period would have left an investor earning an average of less than 1% per year. In contrast, staying fully invested through the dot-com bubble and the Great Recession would still have produced a 483% total return for investors.
The point is simple: Timing the market with any consistency over the long term is practically impossible. Instead, influential investors like Peter Lynch advise investors to stick to companies they understand and believe in, and to stay invested in those companies over the long term. In other words, think like Warren Buffett and ask yourself this question: If the market closed for 10 years tomorrow, would I be happy holding this stock all the while? If you can answer "yes" for all of your portfolio holdings, you're probably on the right track.
The secret is no secret at all
Although $67 billion may be a bit out of reach for most us, the secret to successful investing is no secret at all. As these aforementioned investing moguls have preached, starting to save as early as possible, diversifying your income stream across stocks and other forms of income, and having a long-term view on those investments will be your key to financial success.