"The Best time to plant a tree was 20 years ago. The second best time is now." – Chinese Proverb.
Too many people think the sharemarket is a place to 'get-rich-quick'.
Unsurprisingly, those types don't last very long. You can see them walking down the street. They're the ones carrying a disdain for sharemarkets throughout their entire lives.
They tried to do the impossible and time the market, or simply sold out of their holdings when times got a little uncertain.
Having the right temperament and expectations are imperative to investing success, whether in the sharemarket or otherwise.
Indeed, it's hard to believe the world's most successful investors would be prepared to sell all of their shares at low prices simply because they're scared of what could happen next.
Instead, they stomach any turbulence in the markets, recognise that the world will continue to go around, and move on.
But that's not all they appear to have in common.
3 steps to become a sharemarket millionaire
1. Invest Long Term.
It sounds simple — too simple. But the first and most important rule to successful investing in the sharemarket is a long-term disposition. Remember, it's about time in the market, not timing the market.
Warren Buffett, the world's greatest investor, is worth $US60.8 billion today, according to Forbes, yet when he turned 50 his worth stood at just $300 million. He bought his first investment at age 11. You do the math.
2. Keep It Simple Stupid
Contrary to popular belief, you don't need to be an investing wunderkind, devoting 27 hours per day to research, to be successful in the sharemarket. Various studies have been conducted, but as much as 86% of professional investors fail to beat the market. That's pretty concerning when we consider you could just invest in an index fund which tracks the market — for less than 1% per year — or buy an exchange-traded fund, like the iShares S&P 500 ETF (ASX: IVV) which costs 0.07%.
According to Vanguard, $10,000 invested in Australian shares back in July 1970 would today be worth $351,830. In that period, 9.8% was the market's average yearly return.
But for those of you who want to try your hand in the market, take some tips from Charlie Munger on how to pick winning investments. In this interview with the BBC, following the fallout from the global financial crisis, he identifies the four investment criteria he and Buffett use to pick winning stocks:
3. Add Regularly, Reinvest
While the origin of the quote is disputed, the meaning is powerful. Albert Einstein is believed to have proclaimed: "Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn't…pays it."
Interest earning interest is one of — if not the — most important tools in an investor's arsenal. Leaving your money in your stock account and adding modest amounts regularly allows your profits to make profits. It's a powerful thing.
Going back to our Vanguard example above. If instead of just letting the $10,000 reinvest over time, at the market's yearly average of 9.8%, let's say the investor added an extra $50 a month to their investing account. You can see the result below.
The chart shows that $10,000 invested upfront, with just $50 per month in extra repayments over 46 years, turns into $1.18 million.
Obviously, the better your investing performance, the more time you have to invest and the more you add — the more you'll have.
But, finally, if you're sitting around thinking you don't have 46 years to invest, or it's too late to start, you're not alone. Just remember, it's never too late to plant a tree (hint: a valuable lesson can be learnt from 8:43):
