Only 3 things the most successful investors will understand | personal financing

(Stephon Walters)

One of the things that separate successful investors from unsuccessful investors is that they understand that investing doesn’t have to be difficult, and often, the more difficult it is for yourself, the worse off you are. You don’t have to be a financial genius to be a successful investor; You just need to follow the conventional wisdom and rules that are there for a good reason: it works.

Here are three things that most successful investors understand.

1. Few things are more powerful than multiplying time

Few aspects of investing are stronger than compound growth. When the gains you earned from investing also earns, the growth of your portfolio is falling. For most people who build wealth in the marketplace over time, compounding is what really gets the job done.

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To illustrate, consider three hypothetical people of different ages, each making a one-time $1,000 investment which returns, on average, 10% annually. If they each allowed investing unchanged until they were 65, here’s roughly how much they would have collected.

Initial age years holding investment Investment value at age 65
25 40 $45,200
35 30 17,400 dollars
45 20 6700 dollars

Data source: author accounts

Image source: Getty Images

With enough time, mounting can do a lot of the heavy lifting for you. The combination of time, multiples and a consistent pattern of investing works even more powerfully. At the same average annual rate of return of 10%, if you invested $1,000 per month, after 24 years, you would have a portfolio worth over $1 million.

The key to becoming a millionaire is not to spare a million dollars. It starts early, invests steadily, and lets time and compound growth do the work for you.

2. Market timing is a stupid game

Any investor trying to make money by timing the stock market is playing a losing game. It is almost impossible to do this consistently, and the sooner you understand it, the more headaches (and money) you can save yourself. One of the best things investors can do is use dollar cost averaging, which involves making fixed investments at set intervals, regardless of stock prices or what the market is doing.

Most people with 401(k) plans set them up automatically in a way that takes advantage of the average dollar cost. They contribute a set percentage of each paycheck to their investment, no matter what. Because your investment schedule is pre-set, it helps ensure that you don’t find yourself waiting for the “right” time to invest. You may find yourself investing before the stock goes down or before it goes up. Whatever it is, you have to trust that it will pass with time.

Remember: market time is more important than market timing.

3. The S&P 500 Index Fund must be a key element

The Standard & Poor’s 500 It tracks 500 of the largest US public companies, and is often used to gauge how well the stock market is performing in general. I am a firm believer that the S&P 500 Index Fund should be a staple in any investor’s portfolio. It doesn’t have to be the bulk of the wallet, but you should always be a part of it. With an S&P 500 Index Fund, you get three great benefits from a single investment: instant diversification, low fees, and exposure to many excellent companies.

Past performance in no way guarantees future performance, but it also helps that the S&P 500 has a history of returns of about 10% annually over the long term. There are a lot of smart people working on Wall Street who have pooled mutual funds, and these mutual funds often underperform the S&P 500.

In 2021 alone, 85% of large actively-managed funds underperformed the S&P 500, according to the S&P Indices vs Active (SPIVA) scorecard, which measures actively-managed funds against relevant index criteria.

In 2007, Warren Buffett bet a million dollars that a basket of hedge funds wouldn’t outperform the S&P 500 over the next decade, and he was right. The S&P 500 Index Fund is cheap and reliable – let it lead you to the promised land.

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