“The Best Investment for Retirement: Understanding What You’re Doing.” — Warren Buffett

Warren Buffett is known as one of the most successful investors of all time. And one of the things that makes him so great is that through the years, he’s been more than willing to dish out advice to help everyday people achieve their financial goals.

One big component of Buffett’s strategy is to spend less than what you earn and invest the difference — ideally, for as many years as possible to allow your money to grow.

But Buffett doesn’t recommend throwing money into assets randomly and seeing where that takes you. He thinks there’s one important rule to follow as you embark on your investing journey.

Only invest in assets you understand

There are numerous assets you could invest in today that have the potential to make you money. You could buy stocks, bonds, ETFs, REITs, or dabble in alternative investments, like commodities and collectibles.

But one thing Buffett insists on is only investing in assets you understand. And that’s important advice to follow.

In fact, Buffett has long recommended that everyday investors looking to build retirement wealth invest their money in an S&P 500 index fund. The logic is simple: You’re putting your money into the broad stock market, and it’s an asset you don’t necessarily have to track or think about.

That said, there’s nothing wrong with choosing stocks individually for your portfolio. And doing so could make you a lot of money.

But Buffett says it’s important to invest in companies you understand. That means:

• Understanding their business models and how they make money
• Understanding their strengths and weaknesses
• Understanding how they manage their balance sheets
• Understanding what threats exist

In addition, it’s also important to understand how each asset you choose for your portfolio fits into your investment strategy and lends to your goals.

You shouldn’t rush to buy shares of an emerging tech stock because you keep reading that it’s going to be the next big thing. Rather, you should only buy shares of that company if you understand its inner workings and also understand what benefit it adds to your portfolio.

Understanding what you’re doing is key

There’s no single retirement investment that guarantees success. But if you make a point to only invest in assets you understand, you can minimize a lot of your risk.

Buffett has long emphasized  the importance of staying within one’s “circle of competence.” That means learning the ins and outs of assets you invest in, and avoiding assets that confuse you.

Crypto, for example, tends to get a lot of hype. But if you don’t understand how it works, you shouldn’t be investing in it. Period.

This isn’t to say that you can’t learn your way around new investments. And that’s something Buffett would likely encourage.

But if you want to meet you retirement goals, make sure to stick to Buffett’s basic rule of only putting your money into assets you understand completely. It’s a strategy that’s long served Buffett well, and chances are, it’ll work well for you, too.