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Stop Trying to Get Rich Quick and Upgrade Your Investing Strategy Instead

By James Brumley - Updated Mar 27, 2021 at 9:45PM

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The road to real wealth taking what the market readily gives you, rather than extracting something it's not actually designed to share.

It's easy to believe that dabbling in stocks is an easy way to build wealth. The financial media highlights the market's biggest winners. Many brokerage firms offer unlimited commission-free trades as well as tools that encourage frequent trading. Collectively, they send a message: You're not doing enough, or doing well enough quickly enough.

Such a mindset is ultimately a trap, though. Too many people, in their effort to "get rich quick," end up doing themselves more harm than good. Rushed decisions lead to costly mistakes.

With this as the backdrop, here are four tips that will help you make more money in the long run, but with less work than you're doing now.

Investing 101 written on legal pad paper.

Image source: Getty Images.

1. With trading, less is more

You may hear tales of fellow traders scoring big gains in short periods of time. Just know that these success stories, if they're true, are the exception to the norm. Although the estimates vary a bit from one source to the next, about 90% of traders -- so-called pattern day-traders, mostly -- lose money from their trading activities.

Why don't you hear about this majority of people? Brokerage firms certainly don't want to frighten prospective customers off, but it's not a particularly beneficial truth for the investment media industry either. Perception is powerful, even if the scary statistic is misleading in itself.

The simple solution is, don't try to outmaneuver the market. Most of your gains should come from riding the market's long-term rising tide.

2. Don't sweat P/E ratios too much

The logic is sound enough. The amount of money you're putting at risk investing in a company's stock should be weighed against that company's current and potential per-share profits. The lower the price-to-earnings comparison (or P/E ratio), the more bang you're getting for your buck.

The fact is, however, there's very little correlation between low P/E ratios and a stock's performance. Low-cost stocks tend to remain low-cost stocks, and relatively expensive stocks generally remain expensive.

That's not to suggest investors should never think about valuations. But a high valuation isn't always a dealbreakers.

Fun fact: In his book How to Make Money in Stocks, William J. O'Neil (of Investors Business Daily fame) lays out seven tested and proven criteria for picking winners. Not one of these seven standards considers an earnings-based valuation.

3. Think of your portfolio as a whole

While not without its ups and downs, NVIDIA (NVDA 5.29%) has been a big winner of late. Ditto for rival Advanced Micro Devices (AMD 8.73%). Even shares of Intel (INTC 3.06%) have pushed past the company's foundry challenges to dish out gains; the stock just hit a record high. Investors would have done well with any of them.

That doesn't mean an investor should own all of them at the same time, though.

Admittedly, this scenario is an extreme case of too much concentration in one sector, and not enough diversification. Less obvious concentrations aren't uncommon, though. Amazon (AMZN 4.11%), Google parent Alphabet (GOOGL 1.77%) (GOOG 1.66%), and social networking giant Facebook (FB 1.29%) are all seemingly different kinds of companies on the surface. Under the hood, however, these three stocks are apt to rise and fall together as they're all ultimately dependent on the financial health of the exact same consumers.

In other words, diversify... not just at a sector level but at a style and category level as well.

4. Don't bother trying to time the market

Finally, as tempting as it may be, resist the urge to cash out at what seems like a market high. At the same time, don't wait to step into a new position until you think we're at or near a major low. The odds of precisely picking these turns is low. Indeed, it's unlikely you'll get anywhere near enough to them to do you any good.

And missing the mark by just a couple of days can prove more devastating than you might imagine.

Take last year for instance. The S&P 500 was able to hammer out a nice gain of 16.3% in calendar 2020, overcoming a steep sell-off in February and March that finally ended on March 23. Two of the three best days for the S&P 500 last year, however, were March 24 and March 26. If you take those two days' gains out of the mix, the index would have gained less than 5% in 2020.

Granted, had you also missed last year's worst day (the 12% sell-off suffered on March 16), the gain works its way back up to 15%. You're talking about pinpointing one day's results and the likely pivot point while in the midst of a politically and emotionally charged pandemic, though. That's just not going to happen.

Skip the headache. Just take your lumps and enjoy the rebounds, knowing that time will heal all wounds.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
GOOGL
$2,329.46 (1.77%) $40.56
Intel Corporation Stock Quote
Intel Corporation
INTC
$44.40 (3.06%) $1.32
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$2,307.37 (4.11%) $91.16
NVIDIA Corporation Stock Quote
NVIDIA Corporation
NVDA
$181.77 (5.29%) $9.13
Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
FB
$202.62 (1.29%) $2.58
Advanced Micro Devices, Inc. Stock Quote
Advanced Micro Devices, Inc.
AMD
$102.47 (8.73%) $8.23
Alphabet Inc. Stock Quote
Alphabet Inc.
GOOG
$2,334.03 (1.66%) $38.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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