Smart Investing
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Harvey Jones
22.08.2019

Here’s the one thing you need to become a successful investor

So what is the biggest single thing you need to make a success of being an investor? The answer may surprise you. Some of you may think it comes down to natural investment ability.

 

Well, I hate to disappoint you, but unless your name is Warren Buffett, being "good at investing” is likely to cause as many problems as it solves.

One problem is that people typically overrate their investment abilities, because true genius is rarely found. If you let your ego get in the way, you are likely to make rash errors, and will always be at risk of hubris.

Just look at star UK fund manager Neil Woodford. After three decades at the top, he made a string of bad investment calls compounded by the error of moving outside his core competence of large-cap dividend stocks into small, illiquid companies. Investment research repeatedly shows that around three quarters of fund managers fail to beat their index, and the longer the comparison period, the more likely they are to underperform. You may be a bright spark, but that's not enough. It could even be your downfall.

Good call

So does success come down to making top investment calls? Only up to a point. If you bought, say, Amazon stock straight after the dot.com crash, your timing was sublime and you will be far richer as a result.

So how many people did that? A tiny proportion. And even if you get a big call right once, you may lose a lot of money battling to repeat your success.

Nobody can repeatedly time the market correctly, because performance is driven by more variables than any human brain can calculate.

For example, you might think now is a great time to short the market ahead of a stormy autumn, as the global economy slows, the US-China trade war deepens and Brexit turns nasty. The problem is that expert analysts have been predicting a stock market crash every year since the last one, and still haven't got it right.

Nervous investors who kept their money in cash over that time have lost an awful lot of money as a result. If the US Federal Reserve continues to slash interest rates in response to current worries, today’s bull run could get fresh legs, and your short will cost you dear.

Doing your research

In many walks of life, success comes down to hard work. Surely that applies to investing as well? Well, yes, up to a point.

Some people like nothing more than to work through quarterly financial statements and annual reports, poring over cash flow statements, sales figures and operating profits in the hope of unearthing a top opportunity the wider market may have overlooked.

I've worked with some of these people. They are clever, obsessive and their weekends are not their own. Sometimes all that hard work pays off, sometimes it doesn’t. Annual reports hide as much as they reveal. Even if you think you understand a company, you remain at the mercy of events. Hard work can help and if you enjoy reading those reports – go for it. Just remember it is no guarantee of success. Good investors can make bad calls, just ask Mr Woodford.

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Good fortune

So maybe it all comes down to luck. There are a lot of bright people out there, all competing to outdo each other in the hunt for stellar returns.

The law of averages suggests that some will get lucky, and buy the next Amazon or short the S&P 500 at the right time, but most won’t. Since the market is impossible to time, luck clearly does play a part.

The problem is that you cannot rely on it time and time again. At some point, your luck will run out.

The right rules

Perhaps you just need the right principles, some infallible rules that will see you through whatever the market does.

There is plenty you can do to swing the odds of success in your favour. You should carefully research your stock or fund picks to build a balanced, diversified portfolio with a spread of asset classes.

You can also prioritise logic over emotion, by training yourself to stay calm when markets fall, and take the opportunity to buy cheap stocks when others are selling them in a panic. All these things will help.

And the answer is…

There is one attribute that every single investor needs, though.

Time.

If you try to make your fortune in a few months or years, you will need all the luck in the world to achieve it, and nobody has that much luck. However, if you give it 30 or 40 years, and preferably longer, you will almost certainly achieve your goal.

Buy a balanced spread of low-cost exchange traded funds (ETFs) covering the major stock markets, using an investment platform with competitive charges, and let time do the rest.

Invest a regular monthly sum and top it up with lump-sum payments when you have money to spare. Resist the temptation to sell in a slump and instead, take the opportunity to load up on your favourite stocks or funds at knock-down prices. Over the 50 years to December 2018, the US S&P 500 has delivered an average annual return of 11.26%, with dividends reinvested.

If you had invested $10,000 in December 1968 you would have a cool $1.19 million today (before charges).

That's a crude calculation and doesn't take into account inflation, which would have reduced your pot to $161,300 in real terms (you didn't think becoming a millionaire was that easy, did you?) but it illustrates the point. No luck, no genius, and best of all, no poring over company reports. Time has done the job for you.

It's the one thing none of us can live without, so don’t waste it.

Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.


Internaxx Bank S.A. accepts no responsibility for the content of this report and makes no warranty as to its accuracy of completeness. This report is not intended to be financial advice, or a recommendation for any investment or investment strategy. The information is prepared for general information only, and as such, the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Opinions expressed are those of the author, not Internaxx Bank and Internaxx Bank accepts no liability for any loss caused by the use of this information. This report contains information produced by a third party that has been remunerated by Internaxx Bank.

Please note the value of investments can go down as well as up, and you may not get back all the money that you invest. Past performance is no guarantee of future results.

 

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