3 things only the most successful investors will understand | Personal Finance

(James Brumley)

Let’s face it: some investors just do better than others. It may take some of them more time or require an unpopular number to achieve those superior results. But because the best possible net return relative to a given risk is the ultimate goal, it only makes sense to do what works best.

With that as background, here are three not-so-secret secrets the world’s top investors know and trade on, even if it’s tempting not to. In random order…

1. Less is more

It’s a tired (and slightly overused) cliche. It’s a cliche, 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 vision without a deeper explanation. So, for less experienced investors, here’s the overarching foundation for the lesson “less is more”: buy and sell less often and hold more of your stock for longer periods of time. Not that you shouldn’t need to adjust if something changes in the meantime, but as a rule of thumb you should consider sticking to periods of at least five years before getting into a stock.

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It’s a hard thing to be sure, and the financial media generally doesn’t help. Much of the market coverage of cable television and the constant updates of the Internet make it sound like constant stock swapping is the best path to wealth. It’s not. That commentary is largely intended to attract a crowd to deliver ads. However, good investment advice generally does not attract an audience. It’s a problem simply because investors often make short-term buying and selling decisions at the worst possible time for the worst possible reason, trading profits right before or right after they’re harvested.

2. Easier is better

The longer you have been an investor, the more investment prospects than stocks you will encounter. Cryptocurrencies have been one of the better alternatives of late, while stock and index options seem to be perennial favorites for those 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 running out of steam.

However, many of these manias are gimmicks primarily intended to enrich the people who push them rather than grow wealth for the investors who risk their own capital. Like most fads, these manias tend to blow up around the time the masses just start pouring in.

The best way to keep things simple is to stick with stocks… instruments that have stood the test of time. They are not always the best performers in the short term. However, they usually perform best in the long run because they are holdings in companies that you can see, understand and evaluate. The same cannot be said for cryptos, or even for many commodities.

3. Time is your best ally

Finally, the world’s most successful investors understand that the greatest returns come from leaving stock ownership alone for years. That’s true even in the years when stocks — or any particular stock — are struggling. The greatest payback occurs during the latter parts of a holding period where profits are reinvested in the market.

Some math puts this reality into perspective. Suppose you contribute $10,000 per year to a fund based on the S&P 500 table of contents (SNPINDEX: ^GSPC), earn an average return of 10% per year and reinvest the earnings of a given year. At the end of 30 years, you’re sitting on a nest of just over $1.8 million. The thing is, about $1 million of that total nest egg only took shape in the last eight years of that 30-year period. It took 22 years to build an asset base to meaningfully benefit from the S&P 500’s long-term average return.

Here’s another example of the power of pure time: Even if you contributed just $10,000 a year to an S&P 500 index fund for 20 years and then let it ride without adding fresh capital for the next 10, you still end the 30-year stretch with just over $1.6 million. However, if you cashed in $10,000 in annual contributions just after 20 years, you’d only go home with about $630,000.

The moral of the story is: get in and stay in as long as you can so you can monetize as much of your previously earned returns as possible.

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

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