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How To Become A More Successful Investor By Following Warren Buffett’s Only 2 Rules For Investing

How to Become a More Successful Investor by Following Warren Buffett’s Only 2 Rules for Investing

The Ultimate Guide to Investing in Today’s Market

Your next investment could be the turning point in your life… if you make the right decisions.

And the best way to make the right decisions, the kind that will help you achieve financial security and peace of mind when it comes to your money, is through knowledge and careful planning.

It’s about taking the time to research, to understand the markets, the investment strategy. The kind of things that will ultimately ensure you follow the rules of the most successful investor in living memory – which are of course:

“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1” – Warren Buffett

Buffett’s rules, simple as they seem, must inform your approach to every investment you ever put your money into.

So let’s take a look at how you can invest in a way which will not only maximise your returns, but also ensure you are following the rules that have helped the man otherwise known as ‘The Oracle of Omaha’ accumulate wealth in the order of US$86 Billion.

As someone who has studied, been coached by, and followed the lead of some of the best investors today – Buffet included – here are 2 essential ingredients for achieving this:

1. Diversification: the aim is to invest in different asset classes. This way, if one investment drops, you will be protected by your other investments.

2. Time in the market: markets will always fluctuate but the longer you plan to stay invested, the less affected you are by short-term fluctuations.

Next, it’s about understanding your exposure. What are your risks? Are the risks justified and relevant to the potential upside? How do you manage risks? And importantly – what is your risk tolerance?

Risks and Risk Tolerance

Before you decide on the right investment for you, you should consider the risks of investing as this will help you determine the kind of investments that are ideal to you.

Investment risk is the chance that you will lose money that you invest. The types of risks you face depend on your personal situation. Here are some risks you must consider:

  • Interest Rate Risk: interest rate changes can affect your returns or cause you to lose money. This is a risk for fixed interest investments.
  • Credit risk: a company (or government) you lend to will default on the debt and will not be able to make repayments.
  • Market Risk: an investment drops in value due to changes in the economy or an event which affects one (or all) market sectors.
  • Currency risk: international currency changes can impact investments and returns. This can be a key risk for international investments.
  • Liquidity risk: Your investment cannot be sold when you want/need.
  • Inflation risk: the value of your investment may not match the pace of inflation.
  • Timing risk: the timing of your investment decisions may expose you to lower returns or loss of returns.
  • Gearing risk: using borrowed money to invest can produce risks. Your investments may fall in value, but you will still have to pay the remaining loan plus interest on time.

As a general rule of thumb, our advice to our clients is “the higher the expected return on investment, the higher the risk.”

Know your risk tolerance. This is your capability to cope with drops in the value of your investment.

An idea that Coastal Advice Group CEO, Daniel Brown, uses to describe your risk tolerance is the “sleep factor” – knowing how much volatility you can handle.

Ask yourself how you would feel if you went to sleep one day, woke up the next and found that your investment value had dropped 20%? If this would leave you feeling anxious and wanting to ‘cash-out’, high risk investments are probably not for you. But don’t worry, as there is always another investment option.

What’s important is picking the right investment options for your situation. And the wonderful news is, you certainly do have plenty of options.

So, what are your investment options?

1. Cash: safest asset class with a high degree of capital security.

      • Examples: bank/term deposits, savings accounts and cash management trusts.
      • Suitable for: investors with short-term goals and a low tolerance to risk.

2. Fixed Income:a debt security by a bank, corporation or government that pays the investor an ongoing interest at a set rate.

      • Examples: government bonds, corporate bonds and mortgages
      • Suitable for: individuals with low-moderate risk tolerance, investors looking for stability.

3. Listed Property: listed investments in companies and listed property trusts which buy, sell, manage and/or develop a range of properties across different property sectors and locations around the world.

      • Examples: direct investments in residential, industrial or commercial property.
      • Suitable for: investors with long-term goals and moderate-high risk tolerance.

4. Australian Shares: represents part ownership of an Australian company. Shares are sold and bought on the stock exchange.

      • Examples: Shares in companies listed on Australian Securities Exchange (ASX) e.g. BHP Billiton Limited and Caltex Australia Limited.
      • Suitable for: investors with high risk tolerance and a long-term plan for investing.

5. Global Shares: same format as Australian shares with the benefit of investing in a broader range of regions, sectors and companies.

      • Examples: Shares in companies listed on global stock exchanges e.g. Google and Microsoft.
      • Suitable for: investors with high risk tolerance and a long-term investment plan.

6. Alternative Assets: behave differently to traditional assets.

      • Examples: commodities, hedge funds, structured credit, unlisted property and private equity.

Now it’s time to consider how these all apply to your own investment plan. Do your investments match your risk profile? Are you following Buffett’s rules? Have you thought about how to manage your downside as much as how to generate returns?

If you’re at all like many of our time poor clients, it may be time to consider enlisting the support of a certified financial planner. Someone who can help you ensure your investment plan is established on the foundations fundamental to achieving success as an investor.

Research, knowledge and careful planning.

How can a Financial Adviser help you develop an Investment Strategy?

Financial advice can provide you with investment value by helping you:

  • Set your financial goals
  • Work out your risk tolerance
  • Choose the right investments
  • Make the most of your money
  • Protect your assets

Based on our personalised financial advice, you can make the right investments to help you achieve your investment goals and build wealth for your future.

If you are ready to make your next successful investment, schedule an initial appointment with one of experienced Financial Advisers. We have offices located in The Junction (NFPG), Erina (CCFPG) and Sydney CBD (SWA).



DISCLAIMER: The views expressed in this publication are solely those of the author; they are not reflective or indicative of RI Advice Group’s position and are not to be attributed to RI Advice Group. They cannot be reproduced in any form without the express written consent of the author. This information (including taxation) is general in nature and does not consider your individual circumstances or needs. Do not act until you seek professional advice. Newcastle Financial Planning Group, Central Coast Financial Planning Group, Sydney Wealth Advisers, Coastal Advice Port Macquarie and Coastal Advice Ballina Byron are subsidiaries of Coastal Advice Group Pty Ltd which is a Corporate Authorised Representative of RI Advice Group Pty Ltd, ABN 23 001 774 125 AFSL 238429.
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