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Over $100 billion later, some would venture to say that Warren Buffett is good at investing. One of the most impressive things about his success is that it didn’t take some never-seen-before, innovative strategy. His strategy is quite simple, and he’s never shied away from sharing it with the world: Look for undervalued stocks and trust the power of time.
Time is king in investing
Warren Buffett is a huge preacher of a buy-and-hold investment strategy because he understands the power of time and compound earnings, calling it “an investor’s best friend.” Compound earnings occur when the money you make on your investments begins to make money on itself, and it’s the phenomenon behind most people’s wealth. Imagine you invest $1,000 and earn 10% yearly interest. In the first year, you’ll earn $100. If you reinvest the $100, now you’ll earn 10% on $1,100. The next year, you’ll be earning 10% on $1,210. And so forth.
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In investing, what people lack in money, they can make up for it with time, thanks to compound earnings.
Suppose you plan to retire at age 65 and begin investing at age 40. If you were to invest $1,000 monthly, receiving 8% annual returns, on average, for 25 years, you’d have accumulated over $877,000, even though you only personally invested $300,000. If you started investing 10 years earlier at age 30, you’d have over $2 million by age 65 while personally investing $420,000. Conversely, if you started 10 years later at age 50 and wanted to reach over $877,000 by age 65, you need to invest around $2,700 monthly.
Consistency
The great thing about time in the stock market is that it often rewards consistency. For many investors, the best way to remain consistent is by using dollar-cost averaging, which involves making investments at set times, regardless of stock prices. It could be every Monday, every 1st and 15th of the month, the last Wednesday of the month, or whatever your heart desires. Sometimes you’ll buy when prices are high; sometimes, you’ll buy when prices are low. The most important thing is sticking to your schedule because it stops you from trying to time the market.
It also doesn’t have to be complicated or time-consuming. Buffett said it best, “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”
Buffett has long preached that you don’t need a portfolio of hundreds of individual stocks or expensive mutual funds — all you need is the S&P 500 (SNPINDEX: ^GSPC), which tracks the largest 500 public U.S. companies. With 10% average returns over the long run, consistent investments into an S&P 500 index fund have historically proven to be one of the easiest ways to build wealth and retire with a nest egg.
There are no guarantees on the S&P 500’s future performance, but given the size of the companies and the sectors they cover, it’s undoubtedly one of the better investments any investor can make. You get exposure to all 11 major sectors, blue chip stocks, and dividend payouts.
The days aren’t always sunny
A large part of understanding the power of time in the stock market is understanding that it’s not a linear process. Time is king in the long run, but the short term can be a rocky road. Since 2000, the S&P 500 has returned over 190%, but during that time, it’s been all but a straightforward path. The index has experienced losses in more than a quarter of those years:
2000: -10.14%
2001: -13.04%
2002: -23.37%
2008: -38.49%
2015: -0.73%
2018: -6.24%
When investing in a stock, do so knowing that rough periods are not just possible; they’re very likely. Warren Buffett once said, “If you aren’t thinking about owning a stock for 10 years, don’t even think about owning it for 10 minutes.” Unless something fundamentally changes with a business or industry, don’t let short-term happenings distract you from your long-term goals. It often does more bad than good.
As a longtime investor, it doesn’t matter if a stock swings from +20% to -20% in the short term. As long as when it’s time to reap the fruits of your labor (preferably near retirement), it has and can provide the returns and value you need. Keep your eyes on the prize.
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Stefon Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
