3 things only the most successful investors will understand | Personal finance

(James Brumley)

Let’s face it, some investors do better than others. It may take some of them longer or require an unpopular track to get those top results. But, since the best possible net return for a given level of risk is the ultimate goal, it makes sense to do what works best.

With that as a backdrop, here are three not-so-secret secrets that the world’s best investors know and act on even when it’s tempting not to. In no particular order…

1. Less is more

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

It is also a vague view without a deeper explanation. So, for less experienced investors, here’s the general basis of the less is more lesson: buy and sell less frequently, and hold more of your stocks for longer periods of time. Not that you shouldn’t adjust as needed if things change in the meantime, but as a general rule you should consider holding periods of at least five years before entering a stock.

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It’s hard to be sure, and the financial media usually doesn’t help. Much of the cable TV market coverage along with the constant updates of the web make it seem like the constant trading of stocks is the best path to wealth. This is not the case. This comment is largely intended to attract a crowd to serve ads to. However, sound investment advice does not usually attract and excite crowds. This is a problem simply because investors often make short-term buy and sell decisions at the worst possible time for the worst possible reason, trading profits just before or just after they are harvested.

2. The simpler, the better

The longer you are an investor, the more investment opportunities other than stocks you will encounter. Cryptocurrencies have been one of the hottest alternatives lately, while stock and index options seem to be perennial favorites for people looking to squeeze a little more out of the market. Commodities like gold and even physical real estate also seem to catch people’s attention cyclically when the stock market seems to be running out of steam.

However, many of these fads are gimmicks intended primarily to enrich the people pushing them rather than increasing the wealth of investors who risk their own capital on them. Like most fads, these fads tend to die out just when the masses are just starting to arrive.

Your best bet is to keep it simple by sticking to stocks…instruments that have stood the test of time. They are not always the best performers in the short term. However, they tend to be the best performers over the long term, because they are stakes in companies that you can see, understand, and gauge their earnings. The same cannot be said for cryptos, or even many commodities.

3. Time is your best ally

Finally, the world’s most successful investors understand that the biggest returns come from leaving stocks in place for years. This is true even in years when stocks – or one stock in particular – are struggling. The largest paybacks materialize during the latter parts of a holding period during which gains are reinvested in the market.

A few calculations put this reality into perspective. Suppose you contribute $10,000 per year to a fund based on the S&P500 index (SNP INDEX: ^GSPC), earning an average return of 10% per year and reinvesting the profits of a given year. After 30 years, you would be sitting on a nest egg of just over $1.8 million. The fact is that about $1 million of that total nest egg only took shape in the last eight years of that 30-year period. It took 22 years to build an asset base from which to derive significant benefit from the long-term average return of the S&P 500.

Here’s another example of the power of time: even if you only contributed $10,000 a year to an S&P 500 index fund for 20 years, then let it roll without any new capital being added for the Next 10 years, you’ll still end the 30 Year Stretch with just over $1.6 million. If you cashed out right after 20 years of annual dues of $10,000, you would only walk away with about $630,000.

The moral of the story is to get in and stay as long as possible, so you can earn money on as many of your previously earned returns as possible.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

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