There are a wide range of investment styles and strategies that successful investors use to generate strong returns over the long run.
But as different as their overall strategies may be, the majority of them will share a number of traits in common that have contributed to their success. The good news is that there’s nothing to stop the average investor from using these same techniques.
Here are six easy steps to becoming a successful investor:
Start investing early.
Time is one of the greatest assets that an investor has thanks to the power of compound interest. Legendary investor Warren Buffett once quipped: “My wealth has come from a combination of living in America, some lucky genes, and compound interest.” According to research by Fidelity, despite a number of market events including the Global Financial Crisis and the bursting of the dot-com bubble, the Australian share market provided an average total return of 9.5% per annum over the 30 years to June 2019. This means that a single $10,000 investment in the share market would have grown to be worth a sizeable ~$152,000 at the end of the 30 years if it earned the market return. And if this level of return was sustained for a total of 50 years, that single $10,000 investment would be worth ~$935,000. Which certainly would be a nice boost to your retirement fund if you started when you were 18 years old.
There are a number of benefits to investing regularly in the share market. One is dollar-cost averaging, which can reduce the impact of volatility on your purchase of shares. This is because volatility should actually work in your favour as you will be purchasing more shares when the price is low, and fewer shares when the price is high. In addition to this, investing regularly lets you benefit fully from compound interest. For example, if you had invested $10,000 each year over the 30 years instead of just a single $10,000 investment, your investment would be worth a massive $1.65 million at the end of the period.
Buy top quality companies.
Another way to become a successful investor is to resist the temptation of buying hyped up shares that promise the world and deliver nothing. After all, for every Afterpay Touch Group Ltd (ASX: APT) success story, there are a large number of companies that fail to deliver on their potential and end up fighting for survival or even going out of business. Instead, investors that buy quality companies with strong business models, sustainable competitive advantages, and solid growth prospects are likely to be rewarded with outsized returns over the long term. Two prime examples of this are Sydney Airport Holdings Pty Ltd (ASX: SYD) and Transurban Group (ASX: TCL). Despite being regarded by many as “boring” investments, the shares of the airport operator and toll road giant have generated exciting total returns for investors over the last decade thanks to the quality of their operations and strong market positions.
Reinvest your dividends.
Many ASX 200 shares such as Commonwealth Bank of Australia (ASX: CBA), QBE Insurance Group Ltd (ASX: QBE), and Telstra Corporation Ltd (ASX: TLS) pay their shareholders a dividend every six months. If you’re not investing for income, then reinvesting these dividends can be a good way to generate wealth over the long term. Investors could choose to either participate in the company’s dividend reinvestment plan (which pays you shares instead of dividends and sometimes at a discount to the current share price) or simply reinvest the funds back into other areas of the market which potentially offer even greater returns.
Hold shares for the long-term.
Buying high-quality companies with a long-term view (generally at least a decade) is one of the best ways to grow your wealth as an investor. A great example of this is the Altium Limited (ASX: ALU) share price. The design software provider’s shares were trading as lows as 32 cents in 2009, whereas 10 years later in the middle of 2019 they were up as high as $38.49. This means anyone lucky enough to hold its shares from bottom to top made a 120x return on their original investment. To put that into context, that would have turned $10,000 into $1.2 million. And let’s not forget the CSL Limited (ASX: CSL) share price. It listed on the share market over two decades ago when the government decided to privatise the Commonwealth Serum Laboratories business. A $10,000 investment on day one would have made you a multi-millionaire today. What I think is important to note with both companies is that their shares have not gone up in a straight line. In fact, numerous times over the years their shares have made considerable pull-backs. If you’d sold out on any of those occasions you would have sacrificed significant future gains.
Don’t let short term volatility scare you off.
Which leads us onto this sixth step. A final way to become a successful investor is to not let short term volatility put you off investing and to just accept it as part of the process. Legendary investor Peter Lynch once said: “A stock market decline is as routine as a January blizzard in Colorado. If you’re prepared, it can’t hurt you. A decline is a great opportunity to pick up bargains left behind by investors who are fleeing the storm in panic.”
Overall, I believe that by following these six easy steps you will have the best chance of becoming a successful investor in the future. And a good place to start would be investing in these highly rated shares which tick a lot of boxes.
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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and CSL Ltd. The Motley Fool Australia owns shares of and has recommended Sydney Airport Holdings Limited, Telstra Limited, and Transurban Group. The Motley Fool Australia owns shares of Altium. 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 Scott Phillips.