It is easy to view the stories of market speculation that have dominated the news lately as cautionary stories for individual investors. But we can also view the current moment as an opportunity to welcome a new group of investors into the market: those who have been attracted to all high-stakes action but want an investment approach that doesn’t keep them informed overnight.
Some market enthusiasts may tell you otherwise, however You don’t have to find the next big stock to win in the stock market. Focusing all of your investment in one or two companies can expose yourself to unnecessary risk. Even if you manage to win a few big winners, luck is unlikely to repeat itself during a lifetime of investing.
One of the differences between long-term investing and short-term trading or day trading is that the latter often involves trying to time short-term market movements. Just like in gambling, people sometimes hit it big, but There’s a good chance they’ll lose too. For every person who got in and out of a hot stock at the right time, there is another person who bought or sold at the wrong time. Treating the market like a casino means picking the right stock as well as the right moment.
Losing money isn’t the only danger when it comes to identifying winners in the stock market. Let’s not forget the other effect of building an investment strategy on emotions and impulses: a hectic, anxious state of mind. The benefits of a long-term investor are not only financial, but also psychological. To maintain a calmer, more conscious perspective, rely on the entire market rather than individual stocks through a inexpensive, highly diversified portfolio. Then let the time and power of compounding do its job. Compounding can be an investor’s best friend: at an annual rate of around 10% – that was the historical return on US stocks – a dollar invested in the market doubles every seven years.
Index funds can be a good solution for many people. I helped create one of the earliest index funds early in my career and enjoyed watching the positive impact indexing had on the industry and investors. For those who want more customization and flexibility, there are ways to build on the strengths of indexing while correcting some of its weaknesses. At Dimensional, we’ve been working to improve indexing for 40 years.
With all of the options now available to investors, creating a solid investment plan – one to stick with – is key. Markets have never been so accessible and information has never been so widespread. But sometimes too much information can be overwhelming, and that’s when you work with a trusted financial advisor. A trustee who puts your interests first, can help.
If you want to become a long-term investor, you should opt for a lifelong strategy that takes into account your personal goals, your situation and your tolerance for risk. And remember, even though the U.S. stock market has averaged around 10% annual return, returns can vary widely for individual companies and individual years. (We call these uneven distributions “fat cocks. ”) It is always important to look at the bigger picture. A big profit on a stock doesn’t mean much today if you lose it tomorrow.
I was fortunate to survive the 1973-1974 market crash, 1987 Black Monday, 1997 Asian financial crisis, the tech boom and bankruptcy of 2000, and the great recession of 2008-2009. I’m sure you won’t be surprised when I tell you these were not easy times. For those who have not experienced these periods firsthand, the fear they caused is just an abstraction. But now a new generation of investors could feel the whiplash.
I tell them resist the temptation to be myopic. Consider you a long term investor. Instead of focusing on what the market did “that day”, Check out what it’s done over the past decade. Investing is a lifelong journey. Earning money slowly is much better than making money quickly – and then losing.
David Booth is the founder and executive chairman of Dimensional Fund Advisors and a trustee of the University of Chicago, whose State School of Business is named after him.
