Most Australians know the local share market has performed better than property and cash over the long term.
Yet so many people avoid investing on the ASX because they don’t understand how shares work, haven’t bothered to understand why prices rise and fall every day, and why things don’t always go according to plan.
Loss aversion bias is the tendency to view the pain of losses worse than the pleasure of gains. How many times have you heard, “the sharemarket is like gambling”, or “I lost so much money when I bought shares of XYZ.”
At the other side of the spectrum, there are those who only talk about their winners (yet it’s usually the people who aren’t as ‘loud’ that are the best investors).
From my experience the thing that separates the best investors is time — not their willingness to take on more risk. They recognise poor day-to-day or year-to-year performances as just that — short term.
They stick to their guns and know time is the best tool for unlocking the potential of share markets.
These ‘low-risk’ investors don’t chase 100% share price gains down a lithium-filled warren. They buy shares of decades-old dividend-paying companies like Westfield Corp Ltd (ASX: WFD) and Cochlear Limited (ASX: COH), reinvesting their dividends and pocket the gains from capital growth over the long-term.
Chances are you know both Westfield and Cochlear for their quality service and dominance in their respective markets.
Successful low-risk investors also recognise their limitations. They stick to the industries they know best, don’t buy just one or two shares, and avoid following the herd.
These investors stick a big chunk of their wealth overseas, in passive investments such as the iShares Global Consumer Staples ETF. Found on Google Finance as ISGLCOSTP CDI 1:1 (ASX: IXI), this pooled investment (which you buy on the ASX like any other stock) simply tracks 1,200 of the world’s most reputable companies, like Nestle and Coca-Cola. It’s yet another low-risk investment for successful investors to consider.
Textbooks will tell you shares are a riskier investment than term deposits and cash. Indeed, if you approach your investing with the wrong attitude towards what is and what isn’t risk, it certainly is.
However, if you are smart with your finances, keep cash in reserve and avoid excessive debt and spending, the share market is most likely to produce the best results over the ultra-long-term.
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Motley Fool Contributor Owen Raszkiewicz owns shares of Cochlear and has a financial interest in the iShares Global Consumer Staples ETF. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.
The Motley Fool Australia owns shares of iShares Global Consumer Staples ETF. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.