If you’ve £5k, or any other amount, to invest, then following Warren Buffett’s advice on money and financial planning may be a sensible decision.
Indeed, Buffett is, without doubt, one of the world’s most successful investors. Over the past 70 years, he’s spent decades carefully selecting stocks and buying companies.
And his strategy is based around a few simple tips that are quite straightforward to follow.
Warren Buffett tips
His first piece of advice is to avoid debt. This is applicable for both personal balance sheets and businesses. The most common reason why firms fail is too much debt. It’s also one of the most common reasons why people get into financial difficulty.
Therefore, if you want to improve your financial position, paying off any outstanding debt, or avoiding borrowing altogether, may be the right decision. At the same time, if you’re looking for businesses to invest your hard-earned money, it might be best to avoid companies reliant on borrowing.
Invest for success
At the age of 89, Buffett’s been investing for seven-and-a-half decades. He realised pretty early on that the stock market was one of the best ways to build wealth over the long run. So he started investing as a teenager. The rest is history.
We can learn a lot from this approach. Over the past 100 years, UK stocks have produced an average return of 5% per annum after inflation. Stocks outperformed every other asset over this time frame.
As such, if you’re looking to build your wealth over the long run, it makes sense to follow Buffett and buy stocks. While he picks stocks himself, he also advocates buying an index fund. This may be the best option if you don’t have the time to research lots of individual companies.
Hold cash
History shows that buying stocks at low levels generates the best returns over the long run. Buffett swears by this approach. That’s why he likes to have a lot of cash ready to take advantage of opportunities. Right now, the billionaire investor has about $130bn of cash ready to invest in attractive opportunities.
The average investor may not have anywhere near as much money, but that doesn’t mean we can’t learn from this approach.
Having cash on hand ready to take advantage of opportunities and provide a cushion in uncertain times, is very sensible. With that in mind, it may be best to only invest what you can afford and leave several months of cash in a savings account.
This would provide dry power to take advantage of attractive investment opportunities if there’s another stock market crash. It would also provide cash to cover living expenses in an economic downturn.
The tips from Buffett won’t make you a millionaire overnight, but they could put you on the path to financial freedom in the long run.