Dave Barry has quipped that “The one thing that unites all human beings, regardless of age, gender, religion or ethnic background, is that we all believe we are above-average drivers.” While we might have high opinions of our driving, many of us have much less confidence in our investing.
Fortunately, though, it's not that hard to be an above-average investor — in part because average investors don't do as well as they could. Multiple studies have found them underperforming the overall stock market significantly.
So aim to be better than the average investor. Here are five secrets that can help you succeed.
1. Control your emotions
First off, it's critical to control your emotions. One reason that many investors have underperformed simple broad-market index funds is because they tend to jump out of the market when it heads south and jump back in when it's soaring. That's the opposite of buying low and selling high — and a recipe for very lackluster returns.
You need to expect volatility in the market and aim to keep your long-term dollars invested in it while not following the crowds. As Warren Buffett has explained, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” In other words, when the stock market crashes, as it inevitably will now and then, see that as an opportunity to scoop up some bargains.
2. Be patient
Next, you need to be patient, because great wealth is generally built over decades, not weeks or months. Many investors, especially newer ones, will give up on a stock and sell their shares if it has not risen in a while after they buy it. Or they might sell after it does perform: If it, say, grows by 40%, they might call it quits, happy with their gain. But if it's a terrific company with a great future ahead of it, they could end up missing out on doubling, tripling, or quadrupling their money, or more.
It can be hard to do nothing much of the time, but that's typically far better than actively buying and selling stocks.
3. Opt for index funds
Investing in low-cost index funds that track the overall stock market is an excellent way to earn an average return. That's a good thing, because over long periods, the overall stock market has grown faster than most alternatives, such as bonds, gold, or real estate, averaging close to 10% growth annually.
Since many index fund investors jump in and out of the market, you'll likely outperform them simply by remaining invested — and, ideally, adding to your position over time. Oddly enough, you can be above average by earning average returns! (Index funds even tend to outperform stock mutual funds actively managed by highly educated Wall Street professionals.)
The table below shows how much you might amass over time investing $10,000 annually and earning an average growth rate of 10% — along with lower rates of 8% and 6%. (There's no guarantee, after all, that the market will average 10% during your investment time frame.)
Growing at 6%
Growing at 8%
Growing at 10%
Clearly, simple index funds can be very powerful wealth builders over time.
4. Read voraciously
Another way to become an above-average investor is to really work at it — by continually learning. Warren Buffett and his business partner, Charlie Munger, have advised just that, with Buffett saying, “Read 500 pages like this every week. That's how knowledge builds up, like compound interest.” Munger added: “Go to bed smarter than when you woke up.”
So what should you read? Even if you don't hit 500 pages every week, aim to read as much as you can. If you own shares of stock in individual companies, read their quarterly and annual reports. Ideally, read reports of their competitors, too, to get a fuller idea of what's going on in the industry. Read books about great businesses, learning how they became great and gleaning clues about how to identify other great businesses. Read about great investors to learn how they have gone about allocating their cash.
5. Stick to your plan
Finally, here's a last secret to being a great investor yourself: Stick with the plan. Sure, go ahead and tweak how you invest over time as you learn more. But stick with your plan to build your wealth by investing in the stock market over many years. Keep adding money to your investments, and keep reading and learning. Many fortunes were never made because investors got bored or discouraged or simply lost focus. Don't do that.
Investing can be supremely rewarding — and even fun — if you stick with it. Earning a 10% return when your portfolio is only worth $30,000 means $3,000 more in it — which is great. But years down the road, when you have a portfolio worth, say, $1 million, a 10% gain will mean $100,000 more. It takes time, but it works.
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