Young investors are typically focused on growing their portfolios. They can invest in risky assets like stocks since they have time to ride out market volatility. However, your risk tolerance — and therefore your investment strategy — usually changes as you age. When you enter your 50s, retirement is within reach, and there are more consequences if a risky investment doesn’t pan out.
These investors can get a lot of value from Warren Buffett’s three rules that have guided him to market-beating returns. You can use these rules from the Berkshire Hathaway's chairman to protect your retirement savings after 50.
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1. Don’t lose money
One of Buffett’s most famous rules is to never lose money. While this may sound like an obvious suggestion, the meaning behind it is to focus on capital preservation instead of chasing high returns.
Investors can get exposure to growth potential while also avoiding the risk of concentrating their wealth in just a few stocks by investing in low-fee index funds. These assets follow popular benchmarks like the S&P 500 and Nasdaq Composite, and they tend to deliver competitive returns.
You may see short-term unrealized capital losses, but remember that they only turn into actual losses if you sell your shares. While Buffett has logged some losses throughout his career, his wins outnumber his losses, which is why he has become one of the world’s most successful investors.
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2. Invest in what you know
Buffett recommends that investors avoid investing in aspects of the market and businesses that they don’t understand. While that may mean missing out on some stocks that take off, it also means you’re not likely to sink your money in stocks that are passing fads without strong fundamentals.
When you are in your 50s, you don’t need a moonshot investment. Instead, you need steady, long-term returns from proven investments like index funds, dividend stocks and businesses that you can understand.
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3. Keep costs low
Stock trading costs have gone down in recent years, with many brokerage firms nixing commission fees for stock trades. However, there are still other expenses to keep in mind, like expense ratios and taxes.
Exchange-traded funds (ETFs) and mutual funds have costs that are reflected in the expense ratio. You can find passively managed index funds with expense ratios below 0.10%. However, there are actively managed funds with expense ratios that are closer to 1% or higher. Those funds with higher expense ratios can eat away at your savings and minimize long-term gains.
Investors should also consider capital gains before selling their winners. If you wait until you've held a position for more than one year, realized gains are treated as long-term capital gains, which are taxed at a lower rate than their short-term counterparts.
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