As part of our “Five Days for a Wealthy 2016,” my team and I are covering the five most important steps you need to take today to ensure your financial future. Today, I’m covering the virtue of inactivity.
We’ve given you a few tips over the last few days… and a couple of simple actions to take to ensure that you enjoy a wealthy 2016. Almost everyone can do yesterday’s tip: Increase your savings rate, no matter what it is.
However, in today’s update, we’re going to take a break. Our “action” today is inaction…
Today, I want you to focus on the virtues of remaining patient, having a long-term view, and staying the course in up and down markets.
A research firm called DALBAR tracks what individual investors actually earn on their stock investments. Over the past 30 years, the average investor earned just 3.7% a year… compared with 11.1% for a simple strategy of buying and holding the S&P 500 Index (this is a basket of stocks of the U.S.’s largest 500 companies).
Think about that for a moment. Most individuals miss the movement of stocks and underperform.
That difference comes down to timing. Investors consistently get in and out of the market at the wrong time. They panic and sell at market bottoms. They grow euphoric and buy near the tops. Worse, they move to hot sectors or investments, but fail to catch the big moves.
In another study, Fidelity Investments analyzed client accounts to see who had the best performance. The highest-earning group was composed of those who actually forgot they had investment accounts at Fidelity and never touched them. How strange is that?
This is what keeps investors from reaching their full potential – poor planning and emotional decision-making. They know that investing is hard. They think they need to know what’s going on in the market at all times. They see brokerage commercials with talking babies, day trading with smartphones from high chairs. They figure that’s how investing is done.
The problem is, that’s all wrong…
You can beat the average investor in the DALBAR study… you just need to stop trying.
Stop trying to predict the market and start investing. A simple, diversified, buy-and-hold strategy will earn much more than 3.7%.
You just need to start investing, and then stop messing with it.
Of course… that’s not to say you should throw away your financial statements without opening them. There’s a big difference between leaving your money alone so that it can grow and ignoring it outright. But a few simple things can be done in just a few hours a year to secure your investing success.