“I have done okay, but not as good as the market.”
I received a call a few weeks ago from someone who wanted to know if I can help him trade stocks. I told him that is part of what I do, and I would be happy to speak with him in more depth. He said he likes to trade 10 to 15 times a week, and he believes he can find a stock, let it go up 10 percent and then sell it for a profit. I told him I don’t believe in this type of approach and that it’s a very bad way to build wealth.
Unfortunately, these types of calls are common. I can’t tell you how many people I have met who have tried this “strategy” and ended up with huge losses. Why? Because it is very difficult to always be right, and since the gains being sought are small, one or two big losses become very hard to recover from.
The way to wealth
I recently met a very wealthy lady who had never used a financial adviser, choosing instead to do her own investing based on what she described as “getting good tips and then doing my own research.” She spoke about how much she enjoys trading the market. (It sounded to me more like a legalized way to gamble, but that’s another story.) When I asked if she had achieved success in investing, she nodded and said: “I have done okay, but not as good as the market.”
After a bit more probing, she said she thought investing was easy (even though she had little success), she trusted her friends who gave the tips and didn’t want to pay fees that a financial adviser would charge. So to save a few hundred or thousand dollars in fees, she ended up losing literally hundreds of thousands of dollars in portfolio growth over the last few years.
Too smart for your own good
Whether it’s trying to “outsmart” the stock market by trying to find some kind of cute reason that no one has ever thought about, or that individuals tend to panic when the market drops and they sell their stocks and then only buy back once the market has recovered (the opposite of buy low and sell high), there is plenty of research that shows that individuals who try and time the market with frequent trading tend to underperform broad market indices.
The key to making money in the stock market is not by trying to outsmart the market; it’s by investing with a long-term horizon.
Not to overdose on clichés, but there is another famous investing saying: “It’s time in the market, not timing the market” that is the best way to build wealth.
In an interview with CNBC, none other than Warren Buffet said: “Don’t watch the market closely. The money is made in investments by investing and by owning good companies for long periods of time. If they buy good companies, buy them over time, they’re going to do fine 10, 20, 30 years from now.”
Dull but effective
John Bogle, Vanguard’s found and preacher of long-term passive investing, gave one of his rules on investing: “One of my favorite rules is ‘Don’t peek.’ Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns.”
There is no shortcut to building wealth. It may not be as exciting as constantly buying and selling, but dull is good too.
The way to build wealth is to buy quality assets and hold them over time. In addition, add money to your account whenever possible. By allowing the wonders of compound interest and the growth of the stock market to do their thing, over time you will create a comfortable nest egg.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visitwww.aaronkatsman.com or email email@example.com.