3 Things Only the Most Successful Investors Will Understand. Smart Change: Personal Finance

(James Brumley)

Let’s face it — some investors do better than others. Some of them may take longer or require an unpopular track to achieve those better results. But, in that the best possible net return relative to a certain amount of risk is the ultimate goal, it only makes sense to do what works best.

As a backdrop to this, here are three secrets the world’s best investors know, and act on, even when it’s not tempting. in no particular order…

1. less is more

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

This is also a vague approach without a deeper explanation. So, for less experienced investors, here’s the broad premise for the “less is more” lesson: Buy and sell less frequently, and hold more of your stock for the long term. Not that things should change in the meantime, you shouldn’t adjust as needed, but as a rule of thumb you should think about a period of at least five years before you step into the stock.

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It’s hard to be sure, and the financial media usually doesn’t help. With much of cable TV’s market coverage, as well as the constant updates of the web, it seems like the best route to wealth is to constantly swap stocks. It is not. That commentary is meant to attract the crowd to advertise on a large scale. However, good investment advice usually doesn’t attract and excite the crowd. This is only a problem because investors often make short-term buy and sell decisions at the worst possible time for the worst possible reason, trading just before or right after reaping the profit.

2. Simple is better

The longer you stay an investor, the more opportunities you have for investments other than stocks. Cryptocurrency has been one of the hottest options of late, while equity and index options seem to be perennial favorites for those looking to squeeze a little more out of the market. When the stock market feels like it is running out of steam, commodities like gold and even physical real estate come into the public eye cyclically.

However, many of these crazes are mostly to enrich the people who promote them, rather than raise money for the investors risking their capital. Like most fads, these frenzy fades right when the public is just starting to file.

Your best bet is to keep things simple by sticking with stocks that have stood the test of time. They are not always the best performers in the near term. they are the best artist for the long haulHowever, because they place bets in companies that you can see, understand, and evaluate their earnings. The same cannot be said for crypto, or many commodities.

3. Time is your best ally

In the end, the world’s most successful investors understand that the greatest returns are achieved by leaving the stock holdings alone until the end of the year. This is true even in years when a stock — or a particular stock — is struggling. The largest payouts occur during the last part of the holding period in which profits are reinvested in the market.

Some number-crises put this reality in perspective. Let’s say you’re contributing $10,000 per year to a fund based on S&P 500 index (SNPIndex: ^GSPC), earning an average return of 10% per year, and reinvesting any year’s income. At the end of 30 years, you’ll be sitting on a nest egg of just over $1.8 million. The thing is, about $1 million of that total nest egg didn’t take shape until the last eight years of that 30-year stretch. It took 22 years for the asset base to build up to meaningfully take advantage of the S&P 500’s long-term average return.

Here’s another example of the power of time: Even if you only contributed $10,000 per year to the S&P 500 index fund For 20 years and then let it be for the next 10 with no new capital added, you’d still end the 30 year stretch with a little over $1.6 million. If you cashed out just after 20 years of annual contributions of $10,000, you’d only walk away with $630,000.

The moral of the story is, come in and stay for as long as possible, so that you can make as much money as you can on your first earned return.

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James Brumley Have no position in any of the stocks mentioned. The Motley Fool does not hold any positions in any of the stocks mentioned. The Motley Fool has one Disclosure Policy,

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