This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
I've learned a lot over four decades of investing, including over 20 years now with The Motley Fool. Along the way, I've definitely made my share of mistakes.
To help you boost your chances of scoring those huge winners that make such a difference over the years, I want to tell you about the three biggest things I wish I'd known before I started investing.
I believe these three simple, yet powerful, points have the potential to increase a career nest egg by hundreds of thousands of dollars. Please allow me to show you why I think this is no exaggeration, as well as steps you can take to stack the odds in your favor.
1. Don't worry about trying to time the market
Let me illustrate what I mean with an amazing fact. Perhaps you've heard the story of a Fidelity study that showed its best-performing accounts were ones owned by dead people, because they (being dead and all) never traded anymore -- and these untouched accounts easily outperformed those of active traders.
Now, as best I can tell that study is just an urban legend, but the idea behind it is true. Several studies have shown a direct correlation between trading activity and portfolio performance.
Summed up: These studies show us the more we trade the more our portfolios may suffer. Trying to sell at market highs and buy back in at market lows can be very tempting, but it's nearly impossible to accomplish and can lead to severe underperformance.
At The Motley Fool we believe the greatest way to achieve massive wealth for ordinary investors is to regularly invest over a long period of time, and not worry about where the market happens to be at any particular moment. Having a long-term mentality and ability to ride out the inevitable market downturns is one of the most important aspects of a successful investing career.
Another way to look at it: Trying to avoid market declines is more dangerous than enduring market declines.
2. Timing isn't critical to long-term success, but time is
It may seem hard to do, but if you trust the sheer, brute power of time, you can have a much calmer and rational approach to investing.
Here's another way to think of it: Time can help mediocre investors beat great ones. It's true, you can beat Warren Buffett if you have enough time and we give him time constraints.
The practical application here is to not neglect your early years, because they are key to adding more time in the market for you and increasing the potential of huge favorable swings in the future.
Get started investing as soon as possible to get that compounding machine working.
Morgan Housel, former Fool contributor and author of the fantastic book The Psychology of Money, sums it up like this: "Compound interest is like planting oak trees. One day's progress shows nothing, a few years' progress shows a little, 10 years shows something big, and 50 years creates something absolutely magnificent."
3. One percent makes a huge difference
Eking out 1% more in average annual returns can make a surprisingly huge difference over time, meaning the choice to become a better investor could mean jaw-dropping amounts of money over the years.
Let's take an example of someone who contributes $3,000 a year to their 401(k). My research has shown that earning an extra 1% annually can mean as much as hundreds of thousands of dollars extra over a lifetime, depending on rates of return and time invested. This first example uses 6% vs. 7% average annual returns:
| Years | Jim: 6% Avg. Returns | Jane: 7% Avg. Returns | Difference |
|---|---|---|---|
| 20 | $116,978 | $131,596 | $14,618 |
| 40 | $492,143 | $640,829 | $148,686 |
| 60 | $1,695,348 | $2,611,400 | $916,052 |
And because I love playing with the data, let's get crazy and look at 10% vs. 11% annual returns:
| Years | Jim: 10% Avg. Returns | Jane: 11% Avg. Returns | Difference |
|---|---|---|---|
| 20 | $189,007 | $213,795 | $24,788 |
| 40 | $1,460,555 | $1,937,481 | $476,926 |
| 60 | $10,014,894 | $15,834,369 | $5,819,475 |
Yes, 10% and 11% average annual returns can be tough to achieve, but I think this really illustrates the power of time and higher returns over the decades.
My takeaway
Get your investing career going as soon as you can. Don't try to time the market's ups and downs. Broad market index funds are a great start and might be all you need if you don't have the time or desire to learn more, but remember that every percentage point matters over the long term.
If you decide to go beyond index funds, our Motley Fool stock-picking services generally recommend investors buy shares of at least 25 companies and aim to hold each company for five years or more. We see ourselves as part owners of great businesses, not stock traders.
We think investors should be prepared to see volatility in their portfolios, with drops of 20%, 30%, and even more. That's just the way the market works. But history shows that over time, the ups overpower the downs and the end result can be truly life changing.
So, if you want to avoid the mistakes I've pointed out and are ready to commit to regular investing over the long term, I don't think there's a better time to start than right now.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
