Plus the one golden rule that all successful investors agree on.
“The reality is there will always be a lure to try and beat the market, especially since those who have beat it consistently are revered so highly” — Bill Miller, Peter Lynch, billionaire hedge fund managers
There’s a definite thrill of going up against the market and venturing to come out ahead. For me, investing is a passion. In the past four years, I’ve been reading, listening, experiencing, executing, and in a sense, living with investment every free moment I can find.
It’s a world full of failures, successes, different approaches, and strategies to learn from and benefit continuously. I learn something new about investing almost every single day, sometimes by doing and sometimes from expert sources.
Here, some observations from an investment enthusiast and some of the best in the game, including the one golden rule that every beginner should know.
The ‘golden rule’
In my experience, I’ve noticed that there is one maxim that almost all the successful investors agree on, no matter how vastly their approaches differ from each other.
Never make single stock picks by yourself, if you’re new to investing.
Never think that you can beat the market with your stock picks in the long-term if you haven’t already spent 10,000 hours on investing. Even most of the well-educated and well-trained Wall Street brokers have difficult times against the markets from time to time.
According to Market Watch, only one in every twenty investors beats the market. It means only 5% of the investors bring more returns than what the S&P 500 does. This rate includes professionals.
Don’t only take my word for it. Lots of legendary investors have a comment on beating the market.
Like everybody else in this industry, I have an ego large enough to believe I’m going to be one of the select few that will outperform.” — Gus Sauter, chief investment officer of Vanguard
“It’s possible but not probable” — Robert Laura, president of SYNERGOS Financial Group.
But why?
The main reason behind this improbability of beating the market is because no matter how good you’re at analyzing and understanding a company’s real worth, the stock market may not agree with you on that valuation.
The truth is that the market doesn’t really reflect some magical perfect valuation of a stock under the efficient market hypothesis. It reflects the mass consensus of how actual individual investors value the stock. It is the sum total of everyone’s hopes and fears…”
― M. E. Thomas
There are so many independent variables affecting the price of a single stock in the short-term; there is no way to know what they are and how they’ll drive the price.
Unless you have insider information on one of the publicly traded companies, you won’t know it before the market prices it in. And if you know such a thing, keep in mind that you’re prohibited from trading on such info by law as it’ll give you an unfair edge, as insider trading.
What to do then?
The secret is simple: Buy low-cost index funds or ETFs with an excellent track record from credible investment companies.
An index fund is a portfolio of stocks or bonds designed to mimic the composition and performance of a financial market index.
If you had bought, for example, an S&P 500 index fund ten years ago, you would already have outperformed the majority of the investors out there with an average annual return of 11.174%. Such an annual return would sum up to 188.430% return on your initial investment. Assuming that you have reinvested all the dividends, then the average annual return would be 13.347% and in total 250.035% return (DQYDJ S&P 500 Return Calculator, 2020).
Let’s make it a more realistic scenario with more details. Assuming our initial investment was $10,000 and you have invested $1,000 every month, on top of your initial investment. Then in 10 years with 13.347% annual return, your investment would worth approximately $259,795.58 today.
On top of the financial benefits, investing thorough index funds, you don’t have to check how your stocks are doing each second. You don’t have to decide if it was a mistake to invest in one stock over another, and most importantly, you won’t be losing money in the long term unless the whole financial system collapses and the entire world decides that it’s no longer a need to grow the economy.
Also, it’s possible that the company of your stock choice goes bankrupt and the shares you hold worth zero dollars. However, if one of the companies listed in the index bankrupts, it’ll have a marginal effect on the asset price and replaced with another company with no additional effort from your side.
Besides, investing in index funds will provide you:
Risk Diversification
Asset Availability
Low Cost
Fewer Emotions Involved
How about some examples?
I can list some of the index funds that match these criteria, but note that the aim here is not to make asset recommendations. Also, I’ve given all my examples from Vanguard, which is one of the top investment companies offering such assets, to keep things simple.
As long as it matches the basics of the following assets, you may select your index-funds from similar companies, such as BlackRock, Fidelity, SPDR etc.
If you believe that top U.S. companies will be performing well in the future, VOO (Vanguard S&P 500 ETF) would be one of the best low-cost options. This ETF moves almost identical to its benchmark, S&P 500 Index.
Those who find the exposure of S&P 500 too limited, an index-fund tracking and investing in all publicly traded U.S. companies, such as VTSAX (Vanguard Total Stock Market Index Fund), would be a viable option.
Not everybody thinks that the U.S. will be the best performing market. Then diversifying your portfolio with an index fund that invests in non-U.S. stocks may be an excellent option to consider, ex. VEU (Vanguard All-World ex-U.S. Shares Index ETF).
Based on your risk appetite, stocks may be too volatile. Therefore, I should finalize this shortlist with a fixed income asset, like VBTLX (Vanguard Total Bond Market Index Fund), which is a safe way to invest in high-grade government bonds.
In a nutshell
Investing in stocks is one of the best ways to grow your wealth and reach financial independence as early as possible. However, it’s also a very volatile and risky asset class. Therefore, it’s for investors’ sake to minimize the risks as much as possible.
Choosing an index fund that tracks benchmark indexes like S&P 500, Dow Jones Industrial Average, Russell 2000 or other international indexes would lower your costs, diversify the stocks that you invest in, bring you exposure to more shares, and provide you a less stress-free investment option.
As a final note, my intention is not to tell you that you must invest in stocks, but if you decide to invest in the stock market, there is a better way to invest than picking your individuals stocks.
This article is originally published on Medium!
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Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. Use this information at your own risk.
