Anyone who has been investing a while, has surely made their share of mistakes along the way.
Here are the three most important things any investor should understand before they start investing in order to increase their chances of striking it rich and making a tremendous difference over time.
These three simple, yet powerful, points have the potential to increase a career nest egg by hundreds of thousands of dollars and can stack the odds in your favor.
1. Don't try to time the market
Have you heard the story of a Fidelity study that revealed that the best-performing accounts were those belonging to deceased people, since they (being dead and all) never traded anymore — and these untouched accounts easily outperformed active traders?
As it turns out, study is just a rumour but the concept behind it is real. Several studies have validated the relationship between trading activity and portfolio success.
Studies demonstrate that the more we trade, the more our portfolios may suffer. It's very easy to want to sell at market highs and buy back in at market lows, but it's nearly impossible to do so and result in significant underperformance.
The simplest approach to acquire a large sum of money for modest investors is to invest regularly over an extended period of time, rather than focusing on where the market is at any particular moment. Having a long-term perspective and the ability to weather market downturns is one of the most essential features of a successful investing career.
Another way to think about it is that attempting to avoid market declines is more hazardous than enduring market crashes.
2. Time, not Timing, is critical to long-term success
It may seem difficult, but if you trust the sheer power of time, you can have a calmer and rational approach to investing.
Here's another way to look at it: Time may assist average investors in outperforming excellent ones. It is true that if you have enough time, you can surpass Warren Buffett, and we impose time limits on him.
The takeaway is that you should not forget about your earlier years, because they will aid you in extending your market time and increasing the potential for significant favorable swings in the future.
To get that compounding machine up and running, get started investing as soon as possible. Morgan Housel, and author of the The Psychology of Money, sums it up like this:
"Compound interest is like planting oak trees. One day's progress shows nothing, a few years' progress shows a little, 10 years shows something big, and 50 years creates something absolutely magnificent."
3. One percent can make a big difference
Eeking out 1% more in yearly returns can make a substantial difference over time. In other words, the decision to become a better investor may result in staggering amounts of money over time.
Let's assume a person who contributes $3,000 per year to their 401(k) is interested in saving more money. According to research, earning an extra 1% each year can add up to hundreds of thousands of dollars over a lifetime, depending on rates of return and time invested.
Begin investing as soon as you can. Don't try to time the market's ups and downs. If you don't have the time or desire to learn more, broad market index funds are a good place to start, but keep in mind that every percentage point counts over time.
If you decide to go beyond index funds, experts generally recommend investors buy shares of at least 25 companies and aim to hold each company for five years or more. It's beneficial to see yourself as a part owner of great businesses, not a stock trader.
Investors should expect to experience volatility in their portfolios, with drops of 20%, 30%, and even more. That's just the nature of the market. However, history shows that in the long run, the ups tend to outweigh the downs, and.
So, if you want to avoid the blunders listed and are ready to stick with it for the long haul, there is no better time to begin than now.