Think of your biggest investing success. Maybe it was a mega-sized company whose stock you bought when it was just a startup. Maybe you got in and out of crypto at the right time. Maybe you even managed to cash in on a meme stock.
There are many reasons why a particular trade might be your most successful, but when asked, investors identify one factor above all others.
In a recent client survey conducted by Charles Schwab, 33% of investors attributed their greatest investing success to patience through volatility. Careful research (with 16% of respondents) and high returns (11%) took the other spots on the podium.
As for the biggest culprits behind investors’ worst trades: lack of research (20%), bad timing (18%) and high risk (13%).
In investing, past performance is no guarantee of future results. But with the benefit of hindsight, the collected wisdom and experience of other investors can make you a better builder and manager of your portfolio, experts say. Here’s how.
Manage volatility by knowing your goals
Trading highly risky assets at precisely the right time has made overnight fortunes for some speculators. But for most investors, the winning formula is far more boring: Buy assets that appreciate, hold them over a very long time period and allow compounding interest to work its magic.
The only hiccup with that model is that investments don’t tend to move linearly, but rather fluctuate in value — sometimes quite dramatically over the short term. To reap the benefits of an investment’s long-term growth, you’ll have to be willing to hold, even when dips in value may tempt you to sell.
One way to set yourself up for success on this front is to keep your reason for buying in mind whenever you add an investment to your portfolio, says Mark Riepe, head of the Schwab Center for Financial Research.
“If you bought a stock expecting a big, secular change to happen over the next several years, you can be more patient knowing that this is something you identified ahead of time that’s going to take some time to play out,” he says.
In other words, if you bought stock in artificial intelligence companies with a thesis that the technology would explode over the next 20 years, you might be less likely to sell if your stocks decline in year three.
Another way to help you hold on when things get bumpy: Buy a broadly diversified portfolio and pay as little attention as possible. Spenser Liszt, a certified financial planner and founder of Motif Planning, recalls an old Fidelity study that found its most successful accounts belonged to investors who had died or forgotten their passwords.
“I don’t recommend losing your password or never logging into your account,” he says. “But the more you’re educated on time horizon — when do you need the money? — you can understand that what happens today is not as relevant as what happens over 20, 30, 40, 50 years.”
Know the limitations of your research
Keeping your portfolio in broadly diversified mutual funds and exchange-traded funds also saves you the trouble of conducting the necessary research to choose individual stocks, bonds or cryptocurrency, which can be more than many non-professional investors can handle, says Liszt.
“The conventional story around research is that you need an hour a day per company that you’re invested in,” he says. “Think about how many hours we have in the day for our other interests that aren’t investing or researching companies.”
If you do want to dedicate a portion of your portfolio to investments you pick, be sure to set up some guardrails to make sure you’re making sound decisions that aren’t based on impulse, says Riepe.
“You might say, ‘I’m not going to make an investment decision unless I’ve gone through these four or five steps,'” he says. “That can include exposing yourself to other opinions that may disagree with you. Look at what those other people are saying — maybe you read analyst reports challenging your opinion.”
Putting a sturdy research process in place allows you to think clearly when an investment declines in value. By considering the various possible outcomes for a company when you buy, you won’t be surprised if a stock doesn’t live up to your outlook right away.
“If you write out your thesis — I’m buying for these reasons, and I’m aware of the following risks — then you can see how things play out and be patient through volatility,” says Riepe. “If I find out in 18 months that two legs of that stool have fallen off, I can be more confident that it’s time to move on.”
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