We’ve all heard the annoying examples. If you would have just bought $10,000 of Microsoft stock in 1984, by 2014 you’d be sitting on $5,526,749.
The problem with that is everyone focuses on finding the “next Microsoft.” Next thing you know, you’re investing in something you don’t really understand (Bitcoin, anyone?) and your cash crashes and burns.
The key thing to focus on in the example above is not Microsoft. It’s the length of time that the stock was held.
Time is on your side
Let’s say you did pick a home run stock that really takes off. What would you do once those returns started to stack up?
Many academic studies on individual investor behavior have shown that most people wouldn’t have held their Microsoft for those nearly three decades … A doubling or tripling of their money and they’d have bailed.
Sure, a $30,000 win on a stock pick is nothing to sneeze at. But it’s not the true compounding of returns and wealth accumulation that would have come by simply doing nothing. The smart thing to do is just let it ride.
Few of us have that kind of discipline, though. That’s why passive index funds are such a smart choice — you don’t see the individual wins and losses in the fund. In fact, it’s probably better not to look at how the investment is doing at all, especially after bad news from the market in general.
Time heals all wounds
Even if you stick with individual stocks, you can still come out ahead by making mostly dreadful choices if you manage to make just one smart pick. If you buy and hold, that is.
First of all, make sure you understand the company you’re investing in, even if it’s not sexy or “the next big thing” according to your Uncle Hal. Also, diversify rather than betting it all on one stock.
The key is to allow time to heal the wounds, be selective about what you buy, rarely sell anything, focus on real companies selling real products or services for real cash rather than pipe dreams that promise instant riches, and go about your life.
If you’re behind on your retirement savings, make sure to max out your tax-deferred options first. Then consider setting up a monthly transfer of cash into an index or automated investment fund — and doing your best to ignore its existence.
The Mathematics of Getting Rich By Investing in Stocks (The Balance)
