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Has the stock market not behaved quite as you expected? Perhaps some of your picks that were supposed to pay off in a big way just haven’t. Things certainly look different from the inside looking out than they do from the outside looking in.
The good news is, a few philosophical tweaks to your approach may be all you need to turns your results around. Here are the four biggest stumbling blocks too many investors — particularly new investors — must work past before they start making the sort of money they’d like to.
Myth 1: The more active and involved I am, the more money I make
The idea that “more is better” makes sense…at least on the surface. The more we study, the better grades we make. The more we practice, the better we get at a sport.
When it comes to investing, however, less can be more. Trade less often, and you’ll make more money.
To understand why, think about exactly what you’re investing in when you buy a stock. You’re plugging into the company’s long-term success, and it can take a long time to bear fruit. But, spotting long-term corporate success is actually pretty easy to do.
If instead you’re looking for a big short-term gain on a long-term story, your investment is actually a bet on how other investors will feel about a particular stock in the near future. It’s not easy to predict future perceptions of an unprofitable or barely profitable company, which is why short-term trading is so difficult to do. Ironically, the more you try to trade your way to market-beating results, the worse off you typically end up.
The point is, buy quality stocks and leave them alone. You don’t have to check on them every day. Indeed, doing so increases the risk of making an ill-advised buy or sell.
Image source: Getty Images.
Myth 2: The higher the risk, the greater the reward
There was a time when taking on risk meant getting bigger rewards. But an increasing number of companies, investment banks, and insiders have proven this tenet to be false. Big stock price gains often come before a company’s business model reaches its full potential, and that can raise risk levels without providing any additional reward.
A name like GoPro (NASDAQ: GPRO) comes to mind. While no one denies it makes the world’s very best action cameras, its stock price got ahead of itself in the early to mid-2010s. Yet when ongoing demand for action camera products didn’t live up to expectations, investors paid the price. Even with the rally from its early 2020 lows, shares are still trading 90% below their 2014 peak price.
And that’s certainly not the only example of when the market didn’t recognize the suggested or implied reward was never going to be realized.
Myth 3: I have to pay someone a lot of money to manage my investments
Actually, you don’t.
You can pay someone, of course. Money managers and brokerage firms’ so-called wrap account will charge you on the order of 1% of your portfolio’s value per year. Robo-advisors charge about half of that (or less) for smaller accounts, though there’s very little personal customer service to such plans. Both solutions steer your investments, and for the most part, they do a pretty good job of balancing risk and reward.
But with a little common sense and self-discipline, you can sidestep those fees and manage your own stock portfolio at little or no cost. Most of the reputable online brokers these days offer commission-free trading — not that you should trade more often simply because it doesn’t cost anything to do so.
There’s a lot to be said about picking your own stocks. Aside from learning by starting out conservatively and becoming more aggressive as you gain experience, you might be surprised to find you’re doing better than most professionals do for their customers. In its most recent assessment of the industry, Standard & Poor’s found that only about one-fourth of large cap mutual funds outperformed the S&P 500 over the course of the past five years. The other three-fourths trailed the S&P 500’s performance.
Myth 4: When I buy a stock, that money is given to the underlying company to grow its business
Finally, although most veteran investors (and even newcomers) understand that an investment in a company isn’t the transfer of funds from your account to that organization’s coffers where it’s then spent on growth initiatives. Rather, when you buy a stock — say Procter & Gamble — you’re buying those shares of P&G from another investor who’s more than willing to let go of their stake of the consumer staples giant at the agreed-upon market price. What do they know that you don’t? Maybe nothing. Perhaps they’re just ready to reduce their risk or take on more risk.
There’s a more important takeaway, however. That is, you can’t completely ignore the inherent mispricing stemming from the ongoing auction process. Eventually, a stock is going to become severely overvalued or undervalued, translating into opportunity for you.
Still, awareness of this backdrop shouldn’t distract you from focusing on the long-term bigger picture. Understanding this inner working of the market will simply make you a better buy-and-hold investor.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
