Your 401(k) Is the Ideal Place to Invest Like Warren Buffett: Here's Why

Warren Buffett is worth about $100 billion, and he built that wealth through investing. Understandably, many investors watch his every move and mimic his strategies.

Tracking Buffett’s trades can be intimidating, though. He has billions to work with, while you might have hundreds or thousands of dollars.

Still, it’s probably easier than you’d think to invest like Buffett, albeit on a smaller scale. If you have access to a 401(k) and a budget for retirement contributions, you’re already set up for success.

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Your 401(k) is meant for buy-and-hold investing

Buffett is a practitioner of buy-and-hold investing. That means he likes buying companies that are positioned to perform well over the long term, despite whatever economic crises might lie ahead. Usually these are established, domestic companies with strong balance sheets, enduring competitive advantages, and predictable cash flows.

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Two characteristics of your 401(k) encourage you to practice the buy-and-hold approach: withdrawal restrictions and access to quality, large-cap funds.

1. 401(k) withdrawal restrictions

You might get access to your first 401(k) in your 20s. And thanks to early-withdrawal penalties, you shouldn’t touch those funds until your mid-50s or later. That gives you an investment holding period of at least 30 years.

In reality, you probably won’t liquidate your entire portfolio the day you retire. You will likely hold some of your investments until even later in life — which could be 50 or 60 years from your first 401(k) contribution.

When you can measure your holding period in decades, buy-and-hold investing has the lowest risk and is the most reliable approach. This is because you can stay invested through downturns, which minimizes realized losses.

2. Quality, large-cap funds

Your 401(k) probably offers you a vetted selection of funds for investing. Some 401(k) investment menus are better than others, but all will offer some form of a domestic large-cap fund. A popular choice in this category is an S&P 500 index fund. This is also a fund type that fits right into Buffett’s investing style.

S&P 500 funds hold the 500 largest and most established companies in the U.S. stock market. They’re not all individually Buffett stock picks, but they cumulatively represent the best of American business. And Buffett is bullish on American business, once recommending investors “never bet against America.”

He has also specifically endorsed low-cost S&P 500 funds as a core holding for individual investors.

Keep investing for best results

To implement your Buffett 401(k) strategy, set your investment selections to include an S&P 500 index fund or a similar large-cap fund. For diversity, you might add a small allocation to a government bond fund also. Then, increase your contribution rate now if you can or later when you get a raise.

The next step involves sticking with your plan, which can be the hardest part. If you have the urge to change your mind and pause your contributions, know that this will undercut your wealth potential, especially if you stop investing when share prices are down.

Buffett likes to increase buying activity in down markets, because he can get more for each dollar he invests. The boost in share count positions him well for nice gains on the other side of the downturn.

You might not feel comfortable investing more when share prices are down, but at least avoid reducing your contributions. Again, your 401(k) shines here. Leave it alone and let those automated investments continue. In 30 to 40 years, you should be thrilled with your account’s performance.

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