Frank stock investing advice for people who want long-term wealth
If you think you can consistently invest in the stock market and make massive returns, you’re sadly mistaken. The vast majority of investors who take punts on individual stocks lose their money.
But why? After all, doesn’t the market return six to ten per cent per year?
The reason for this is that the stock market is actually a collection of a small number of winning companies that win big, and a large number of losing firms that don’t.
About ten per cent of companies drive all of the returns in the stock market, with the trailing 90 per cent actually dragging down performance.
For that reason, you only have around one in ten chance of picking a firm that will serve you well in the long-run. The odds are against you.
“Ah,” you might say, “but I know which companies are going to win.”
Perhaps you do, but you need to recognise that this is a rare skill indeed.
Virtually no professional investors consistently beat the market to the point where it becomes statistically significant. Instead, they have outsized gains for a few years and then generally underperform later on.
If you genuinely believe you know which firms are going to win, test yourself first by investing small amounts of money.
If you make five investments and three of them return over 1,000 per cent in ten years, consider yourself a good investor. More likely, none of them will perform the way you expected.
A much better strategy is to simply play a dumb long game using your favourite stock API. Don’t try to evaluate individual companies - let the insurance companies and hedge funds do that.
Instead, work out how you can diversify the market as a whole and make outsized returns that way.
It turns out that just buying a market-tracking fund is the best option for the vast majority of investors. This way, you can equal the market and benefit from the rising tide that raises all boats.
The other thing that you can do is get a professional to manage your money for you. However, your long-term returns will be lower because of their management fee.
In some cases, you may spot an opportunity that other market participants haven’t seen. In which case, perhaps you should buy or sell an individual stock.
But for most people, the best strategy is to simply invest in a well diversified fund and then forget about it. It’s what Warren Buffett recommends.
Stock market investing is not a get-rich-quick scheme. Neither does it guarantee that you will make any money. In some years, your wealth may actually go down, even if you consistently invest every month.
The trick here is to see what happens over long periods. After 20 years, you’re almost certain to make substantial gains that multiply your wealth and transfer purchasing power away from other people and towards you.
The other method is to simply become a stock market genius. But how you do that is anyone’s guess. If it was easy, we’d all be doing it.
