3 things I wish I’d known before I started investing

Do you want to save yourself some aggravation — and potentially a lot of money — by not repeating mistakes of other investors?

Man sits at computer and analyses stock graphic

Image source: Getty Images

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.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of January 12th 2022

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on International Stock News

An arrow representing a bounce up.
International Stock News

Why Ethereum and Dogecoin are recovering nicely today

Is a crypto market recovery underway, or is this a head fake?

Read more »

man looks up at apple on his head
International Stock News

Why Apple stock slipped on Thursday

Don't worry. This looks less like a disaster and more like a buying opportunity.

Read more »

Family of four enjoying the pool at airbnb holiday
International Stock News

Nasdaq bear market: Should you buy the dip on these 2 growth stocks?

These businesses are backed by compelling investment theses.

Read more »

Rede arrow on a stock market chart going down.
International Stock News

Why Bitcoin, Ethereum, and Dogecoin are falling today

Investors are trying to predict how the economy will fare in the coming months, and how fast the Federal Reserve…

Read more »

amazon prime truck on a road
International Stock News

2 reasons Amazon stock is slumping today

Inflation fears and recent quarterly results from its peers are driving the stock lower.

Read more »

Red arrow going down, symbolising a falling share price.
International Stock News

Why Apple Stock is falling today

The market as a whole is down, but the tech sector is doing worse.

Read more »

A stockmarket chart on a red background with an arrow going down, indicating falling share price
International Stock News

Why Tesla stock fell again today

A French bank just said Tesla isn't the best EV stock. Should you worry about that?

Read more »

a group of five people lie on the floor with their heads touching, each wearing hi tech goggles over their eyes as if in a metaverse workplace collaboration.
International Stock News

2 top metaverse stocks I think are ready for a bull run

The metaverse could give these fast-growing tech giants a big shot in the arm.

Read more »