Warren Buffett's investment advice for a new investor who is just getting started
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
OpenAI’s ChatGPT tool responds to an investor question and Certified Financial Planner™ professional, Joe O’Boyle, fine tunes the AI response (in italics). This should be fun!
“Warren Buffett's investment advice for a new investor who is just getting started”
Warren Buffett is known for his simple and straightforward investment advice, especially for new investors who are just getting started. Here are some of the key pieces of advice he has shared over the years:
Start early and be patient: Buffett has often emphasized the importance of starting early in your investing journey, as the power of compounding can work in your favor over time. He also advises investors to be patient and not to get caught up in short-term market fluctuations.
From 1964 through 2021, Warren Buffett & Charlie Munger’s Berkshire Hathaway compounded (grew) at 20.1% per year providing a breathtaking overall gain of 3,641,613%. For comparison's sake, the benchmark S&P 500 stock index compounded (grew) at 10.5% per year for an overall gain of 30,209% over the same time period. Time and compound returns are an incredibly powerful combination in helping long term investors build wealth.Educate yourself: Buffett believes that the key to success in investing is education and understanding. He advises new investors to take the time to educate themselves about the companies they are investing in, the market as a whole, and the principles of value investing.
Buffett has recommended that investors read Benjamin Graham’s “Intelligent Investor” which was written in 1949 and which Buffett credits as being “by far the best book on investing ever written.”Invest in what you know: Buffett advises new investors to invest in companies and industries that they understand, rather than trying to navigate unfamiliar territory. By investing in what you know, you'll be better able to evaluate the long-term prospects of a company. Buffett also refers to this idea as investing within your “circle of competence”.
Look for undervalued stocks: Buffett is a value investor, and he advises new investors to look for undervalued stocks that have the potential to increase in value over time. He suggests to look for companies with a strong competitive advantage, a solid management team, and a history of consistent earnings growth.
Avoid speculative investments: Buffett advises new investors to avoid speculative investments, such as penny stocks or options trading, as they can be high-risk and volatile. He suggests to focus on long-term investments in well-established companies with a strong track record.
Diversify your portfolio: Buffett advises new investors to diversify their portfolio by investing in a mix of stocks, bonds, and cash.
Buffett has long shared his preference for investing in stocks (businesses) over both bonds and cash when investing for the long term. Interestingly, Buffett’s own Berkshire Hathaway stock portfolio is actually highly concentrated (overweight) among just a handful of stocks / individual businesses.
Buffett has stated that for the average investor, a low-cost S&P 500 index fund is the best investment choice. He has recommended that a significant portion of an individual's investment portfolio, around 90%, should be invested in such an index fund. This is because index funds provide broad market exposure and have low management expenses.
The other 10% of the portfolio, he suggests, should be invested in short-term US Treasury bonds. This is to reduce the overall risk of the portfolio, as short-term bonds are considered to be less risky than stocks. The allocation of 90% in the S&P 500 index and 10% in short-term Treasury bonds is a simple, low-cost and effective strategy, suitable for investors who are looking for long-term growth, with a little protection from market downturns.
Please keep in mind that Buffett’s recommendation is based on long-term holding period. A portfolio made up of 90% stocks and 10% short term bonds may experience meaningful declines during shorter term periods. For example, in 2022, the S&P 500 index was down 19% for the year while a short term Treasury bond portfolio was up 1% (iShares ETF: symbol SHV), so a 90% stock / 10% short-term bond portfolio was still down over 17% during 2022.
It's important to note that Buffett's advice is not tailored to any specific individual and that each person's investment strategy should be based on their own financial situation, risk tolerance, time horizon and investment goals. It's always best to consult a financial advisor before making any investment decisions.
What did you think? How did AI do?
About OpenAI’s ChatGPT tool:
GPT (short for "Generative Pre-training Transformer") is a type of language model developed by OpenAI that is trained to generate human-like text. ChatGPT is specifically designed for generating text in a conversational style. It is a machine learning model and has been trained on large datasets of real-world conversations in order to learn the patterns and styles of human communication.
Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.