3 Things Only The Most Successful Investors Will Understand | Personal finance

(James Brumley)

Let’s face it: some investors simply do better than others. It may take longer for some of them or take an unpopular track to get those superior results. But, since the best possible net return versus a given amount of risk is the ultimate ultimate goal, it only makes sense to do what works best.

With that as a backdrop, here are three not-so-secret secrets that the world’s best investors know and act even when tempted not to. In no particular order …

1. Less is more

It’s a tired (and somewhat overused) cliché. It’s a cliché, though, for all the right reasons, including the most important … it’s absolutely true, especially when it comes to investing.

It is also a vague view without a deeper explanation. So, for less experienced investors, here’s the general basis for the “less is more” lesson: buy and sell less frequently and hold more stocks for longer periods. Not that you don’t have to adjust as needed if things change in the meantime, but as a general rule you should think about jail terms of at least five years before getting into an action.

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It’s tough to be sure, and the financial media generally don’t help. Much of the cable TV market coverage, as well as constant web updates, make it seem like constant stock trading is the best route to wealth. It is not. That comment is largely meant to attract a crowd to send advertisements to. Good investment advice, however, generally does not attract and excite the crowd. It’s a problem simply because investors often make short-term buy and sell decisions at the worst possible time for the worst possible reason, trading profits just before or after they are collected.

2. Simpler is better

The longer you are an investor, the more investment prospects you will encounter beyond stocks. Cryptocurrencies have been one of the hottest alternatives in recent times, while stock and index options seem to be perennial favorites for people looking to squeeze a little more out of the market. Commodities like gold and even physical real estate also seem to cyclically grab people’s attention when the stock market feels like it’s ending.

However, many of these crazes are gimmicks intended primarily to enrich the people who push them rather than increase the wealth for investors who risk their capital on them. Like most fashions, these crazes tend to fade just as the masses are just starting to show up.

Your best bet is to keep it simple by sticking to actions … tools that have stood the test of time. They are not always the best short-term performers. They tend to be the best long-term performers, however, because they are holdings in companies that you can see, understand, and evaluate their earnings. The same cannot be said for cryptocurrencies, or even many commodities.

3. Time is your best ally

Finally, the world’s most successful investors understand that the greatest returns come from leaving equity holdings alone for years and years. This is true even in years when stocks – or a stock in particular – are struggling. The biggest gains occur during the latter portions of a holding period where the gains are reinvested in the market.

A little bit of crunching the numbers puts this reality in perspective. Let’s say you are contributing $ 10,000 per year into a fund based on S&P 500 index (SNP INDEX: ^ GSPC), earning an average return of 10% per year and reinvesting the earnings of a given year. At the end of 30 years, you’d be sitting on a nest egg of just over $ 1.8 million. The fact is, about $ 1 million of that total nest egg didn’t take shape until the last eight years of that 30-year period. It took 22 years to build an asset base to take a significant advantage of the S&P 500’s medium to long term return.

Here’s another example of the power of pure time: Even if you only contributed $ 10,000 a year to an S&P 500 index fund for 20 years and then let it go without any new capital being added for the next 10, you’d still end up 30. years with just over $ 1.6 million. If you had cashed in immediately after 20 years of $ 10,000 annual contributions, you would only walk away with about $ 630,000.

The moral of the story is, get in and stay as long as possible, so that you can make as much money as possible on previously earned earnings.

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James Brumley has no position in any of the titles mentioned. The Motley Fool has no position in any of the titles mentioned. The Motley Fool has a disclosure policy.

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