Less is more: Sometimes, what you don’t do is just as important as what you do.
Wall Street benefits from trading activity, and that means it needs reasons to make a lot of changes to your investment portfolio. Some investors believe that they will outperform the market by moving money from one investment to another, and making hundreds of investment decisions annually. The problem is that all this activity and decision making has nothing to do with generating good returns.
Lessons from baseball: You don’t need to swing a lot
Warren Buffett took an important element of his investment strategy from baseball legend Ted Williams, who wrote multiplication. Williams argues that to become a great hitter you have to stop yourself from swinging on shoddy pitches – what you’re looking for is the perfect pitch in your wheelhouse. Warren took the analogy to investing: In investing, you stand all day waiting for the right investment opportunities.
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“You don’t have to make any decisions,” Buffett once said. “Nothing is imposed on you. They can be great pitches to swing in, but if you don’t know enough, you don’t have to swing.”
With so many decisions, thinking goes, you end up being a juggler with a lot of balls in the air. You don’t just drop one – you end up dropping them all.
In my investing journey, making too many investments has proven to be costly. Sometimes my friends and I pressured each other to make an investment decision, either because others benefited from the trade or because stocks were being praised on TV. But we didn’t do the due diligence and research that we should have done, and we ended up with big losses. lesson for us? Be careful, be wise, and understand that sometimes the best move is simply to do nothing until you learn more.
What does this mean for your wallet? It could hardly mean buying or selling stocks for days, weeks or months. The average dollar cost in names may mean the highest convictions. It could simply mean logging out of your accounts and enjoying your life, avoiding the urge to trade and exit positions on a regular basis. Or it could mean writing down a plan at the beginning of each quarter, and outlining a certain number of investment decisions you’ll make that quarter. Once you invest in 10 stocks, for example, you might tell yourself you won’t buy anymore until the next quarter.
Fewer decisions help combat choice overload
Too many choices can cause you to feel overwhelmed, resulting in an inability to make a sound decision. But don’t take it from those who invest billionaires alone. Steve Jobs was famous for wearing the same turtleneck and black jeans every day. Former President Barack Obama wore gray and blue suits only to “reduce decisions,” freeing up his cognitive abilities for important, high-consequence decisions. “You need to focus your energy on making a decision,” Obama said. “You can’t have a day that distracts you from trivia.”
Choice overload, or choice overload, is defined as a cognitive impairment in which people have difficulty making a decision when faced with many choices. Trading stocks from your mobile has never been easier and there are thousands of stocks to choose from, flashing on the screen. It’s easy to get caught up in over-choosing and feel like you need to make too many decisions to make money.
The key to his success, says Charlie Munger, is “sitting on capital investing,” which is another way of saying you’re better off buying and holding high-quality assets, rather than engaging in a lot of buying and selling, trying to anticipate market trends.
The math is clear: Reducing the number of shares you buy and reducing the number of times you buy and sell them can lead to higher returns. Remember that Motley Fool’s philosophy is to hold long term and diversify (25+ stocks) because it helps isolate your portfolio while minimizing risk, especially in uncertain market conditions like the present.
But take it from the best investors: Fewer high-quality decisions about 25+ stocks help you invest with a clearer mind.
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