Despite all the hype and propaganda surrounding investing, it isn’t hard to actually become a successful investor. Well, at least not in theory. In my opinion, the skills and knowledge required to be a good investor are available for the average person. Yes, I’m confident that most people (at least in the USA) have access to everything they need to make good investments that make them a considerable amount of money.
Obviously that begs the question – why are there so many investors who have failed? Well, it’s a mixture of issues, often related to personality. What I mean is this: usually the thing keeping someone from being a successful investor is their lack of discipline and consistency, or their need to jump on bandwagons because they fear missing out.
The “Experts”
I’ll start off by admitting that there are definitely investors out there that are truly exceptional. They know the right investments to make, and profit much more through investing than I ever will. Those types are the ones who can actually consistently beat the market. It’s rare, but it’s out there, and bravo to them. However, most self-proclaimed “experts” who try to assert that they know the ins and outs of the market, and how to time it, usually fall well under the market’s performance.
Active Investors Can’t Seem To Beat The Market
The vast majority of active investors cannot beat the market or even come close to it. The most forgiving estimates tend to lean towards 80-90% of active investors losing when compared to the market’s performance. That’s obviously abysmal, and I don’t know anyone who has much faith in it after hearing numbers like those – however people still end up falling into the trap of thinking they alone can beat the market.
Timing The Market Is A No-Win Scenario
I’ve written on timing the market before, and it is a situation that is impossible to win. Well, you may have luck here or there, but it’s impossible to win over the long-term with consistency. It’s highly speculative, and more like gambling than investing. Don’t fall into the trap of thinking some random stock will make you a millionaire overnight just because someone said it on a YouTube video or on Twitter. Timing the market doesn’t tend to work out, and it is pretty much guaranteed to fail over the long haul.
What’s The Hope For Average Investors Then?
If all of these people claiming to be experts aren’t actually making phenomenal returns, then you might be wondering what the hope is for the average investor. Well, as it turns out it is actually really easy to keep up with the market as an investor. It can be hard to beat it over the long run, but if your goal is to make the same gains as the market, you’ll find it isn’t an outlandish goal.
Also, the market tends to perform really well over decades, so as long as your investment strategy is focused on the future, you’ll likely make good returns this way. A lot of people have made their millions with this strategy, and it’s pretty hard to lose in my opinion. There are just a few things to make sure you consider along the way.
Long-Term
As I said, this works over the long haul. If you’re planning on withdrawing funds within a few years, you may need to change your strategy. Alternatively, if you need to withdraw because you’re retiring, then it may be best to withdraw routinely, to avoid the issues that come with trying to time the market.
For example, draw however much you need (the same amount) every month in perpetuity when you’re retired. That way you don’t withdraw prematurely or jump the gun and pull everything else out when you see dips in the market – which is another reason active investors fail so often. They let emotions dictate their actions, which screws up their results.
Passive Investing
While investing in the stock market, it’s wise to make it as hands-off as possible. Automate your investments with a brokerage like M1 Finance, and try not to monitor the ups and downs of your portfolio too closely. Your investment strategy shouldn’t require constant micromanagement, and the more you pay attention to the downturns, the more likely you are to make a rash decision.
Matching The Market
There are tons of index funds that basically split your investment over a specific market or sector. Using these index funds, it’s pretty easy to invest in the market as a whole, so that you go up or down with the general market. These can be a wild ride in the short-term, but over a long period of time you are likely to make stellar returns. In other words, you’ll make however much the market made over a given period (roughly, at least).
Let’s Get Started
Now that we have the general idea behind how to beat all these active investors, it’s important to actually follow through.
Make More Money
First up, it’s important to make enough money to get started in the first place. Six figures is a perfectly reasonable income for the average person to achieve these days . There are skills you can use to catapult your career, lucrative side hustles you can start, and a myriad of other ways to make money. You just need to take the initiative and start working towards a higher income.
Save More Money
Coupled with making enough money, you also need to practice good habits for saving money. Even if you make a lot of money, it’s pointless if you don’t save any to invest. The main thing I recommend is creating a complete and thorough budget to help you stay on track. It’s not rocket science – the simpler you keep it, the easier it will be to follow through.
On top of that, it’s also important to go over your financial goals. It can be highly illuminating and help you focus on what you need to do. Plus, if you’re struggling with designing the right budget, knowing your specific goals can help you adjust it to get you where you want to be.
Invest More Money
Now, take what we’ve discussed here and begin investing. To start off, I highly recommend building a portfolio in index funds and ETFs using a brokerage like Vanguard or M1 Finance. Index funds and ETFs will help you match the market and make great returns over the years. The main thing to be wary of is their fees – make sure you’re using funds that don’t have outrageously high fees. That way you’ll have top notch performance while having low costs related to overhead, which maximizes your overall profit!
Diversify Your Portfolio
Of course, I understand the desire for an even more diversified portfolio. If you want more diversity, the first thing you can do is invest in different types of index funds and ETFs. There is obviously the S&P 500, which you likely started with, but you can also invest in different sectors or international markets. Do some digging, and figure out what will give you the diversity you desire.
On top of stocks, you can also get into things like real estate. Ventures like rental property investing can take a bit more money to get started with, but a lower entry point is REITs. Just make sure you do your research and know the pros and cons of your investments. Diversity is important, and desirable, but not if you have no real understanding of what you’re investing in and why it’s bad or good.
Make Use Of Retirement Accounts
Another thing to take note of is the different retirement accounts you have at your disposal. This is a serious consideration when you do your retirement planning, but it’s important in general. They have different types of tax benefits that are great to take advantage of. They also come with potential pitfalls – you’ll need to research when you can withdraw funds and whether or not there are penalties for withdrawing before you reach retirement age. If nothing else, consider meeting your company match (if there is one) for your 401(k), and begin putting money in a Roth IRA.
Buy, Hold, And Relax
Now that you’ve got that taken care of, you should be able to hold onto whatever investments you’ve made (particularly index funds & ETFs in this case) and lay back and relax. It shouldn’t require much, if any, extra work or management from you – besides the occasional checkup. If you started investing in real estate, you might have some additional headache to take care of, but that comes with the territory.
Consistency
As I said, discipline and consistency is what separates the successful investors from the failures – far too often. Do yourself a favor and don’t make decisions based on impulse or emotions. If the market drops, ride it out. Your losses are not locked in until you liquidate. Ride out the bad times, so that you can get to the good times on the other side. Additionally, do your best to automate investments. The less work required of you, the easier it is to stay consistent and meet your investment goals.
FOMO
The last, and arguably the most important, thing to mention is FOMO. FOMO stands for the fear of missing out. Now, I know a lot of people who struggle with this, and it seems to be just as much of an issue as staying consistent. Something new comes along, gets turned into a buzzword, and everyone jumps aboard – thinking they’ll make a lot of money with it. Then most of the people who invested end up losing much of what they put in.
Don’t let your fear of missing out on the “next big thing” lead you to make a bad decision with your investments. You should err on the side of caution – invest in something only if you believe in the returns, not just because a lot of people are hopping on the bandwagon.
Conclusion
Hopefully that gave you everything you need to know to get started and become a successful investor! If you have any tips of your own, let us know them in the comments. For more content like this, and a free budgeting template and financial goals worksheet, be sure to sign up for the Bitter to Richer newsletter.
