The One Warren Buffett Rule Every Investor Should Follow

Key points

  • Holding quality stocks for many years could be your ticket to growing wealth. 
  • It’s also a good idea to invest broadly and maintain a diversified portfolio through the years.

These days, a fair share of financial experts are cautioning investors to gear up for a potential recession. And that could lead to a world of stock market turbulence.

As an investor, that’s not the kind of news you want to hear. Your IRA or brokerage account balance could easily take a hit if market conditions sour.

But the reality is that it’s not just periods of broad economic decline that have the potential to send stock values plummeting. That’s why if your goal is to grow a lot of wealth by investing, it’s important to follow this important Warren Buffett rule.

Learn from Buffett

With an estimated net worth of more than $112 billion, it’s fair to call Warren Buffett one of the most successful investors of our time. Buffett is the CEO of Berkshire Hathaway, a conglomerate that holds several well-known companies. One of the reasons he’s been able to grow so much wealth in his life is that he’s chosen quality investments and stuck with them for the long haul. And if you want to be successful as an investor, it pays to follow his lead.

Buffett has been famously quoted as saying, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.” And if you follow that same rule in the course of your investing career, then your chances of making money may be a lot higher.

Investors often lose money in the stock market by selling their stocks the moment their value starts to fall. And they often limit the extent to which they can grow wealth by cashing out stocks at a modest gain rather than being patient and waiting for even larger gains over time. 

If you’d rather set yourself on a different path, load your portfolio with a diverse mix of quality investments and pledge to hold them for as many years as you can. That could be 20 years, 30 years, or 50 years. 

In fact, let’s say you manage to pick a winning stock that grows 12% a year, on average, over a 30-year period. If you invest $1,000 in that stock, sit back, and leave your portfolio alone, that position will be worth around $30,000. So all told, you’ll end up with 30 times your initial investment.

And for context, the broad stock market has delivered an average annual 10% return (before inflation) over the past 50 years, as measured by the performance of the S&P 500 index. So a 12% return on an individual company that performs well is a perfectly reasonable assumption.

Diversification is key as well

In addition to adopting a “buy and hold” strategy, Buffett has also advised that average investors should put their money into the broad market. So if you’re not sure which stocks are best for your portfolio, fall back on broad market ETFs, like those that aim to match the performance of the S&P 500 index. 

Investing in stocks isn’t for the faint of heart. And there may be times when you’re tempted to sell off stocks either to minimize losses or capitalize on gains. But if you really want to do well as an investor, it pays to do what Buffett says and hold your assets as long as you can. If you’re patient, you might be rewarded in a very big way.

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