Investing is a very serious business. If you buy the right stocks, they can pay for your house, your retirement, or your child's education. Investing can make you a millionaire. But thinking about money can cause stress. And, ironically, if you worry about your investments a lot, you might well turn out to be an underperforming stock investor.
What I've discovered is that if you can reduce your stress level with stock investing, it makes it less scary -- especially as your stocks increase in value dramatically over time. Here are four tips about how to put the odds of the stock market in your favor.
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1. Stay in the market, and give your investments time to grow
Many investors get very competitive, wanting to make money fast. One mistake many make early on is actively managing their portfolios, buying and selling stocks. Most day traders find their performance turns out to be mediocre at best.
It's counterintuitive, but if you stop paying as much attention to the stock market, it can be more effective in doing its work in building up your wealth. Your stocks don't need you to micro-manage them. More often than not, your stocks just needed you to leave them alone.
2. Forget about the money
Amazing investments can be highly volatile in the short term. When you buy a high-flying stock, your portfolio might drop thousands of dollars in a day. Overcome by fear, you might remove your money from the market at the worst possible time. And that's how people lose money in the stock market.
Think about it: On bad days in the market, billionaires lose billions of dollars. Those losses happen all the time. In the short term, stocks can do anything. Those whose wealth is tied to the market feel the impact of those movements constantly.
So many people succumb to greed and cash out when they've made some short-term money. Or they succumb to fear and cash out when they've lost some short-term money.
If you give in to these impulses, though, you'll almost certainly underperform the stock market dramatically. You'll miss out on the gains you could have made by holding onto winning stocks over time.
3. Winners might look like losers in the short term
Aggressive investors swing for the fences and try to find the best winners in the stock market. I love the high flyers. But doing so means getting a lot of calls wrong.
The experience is especially humbling because companies often mount comebacks from seemingly impossible challenges. Those who've held winners like Amazon (AMZN 3.43%) and hold them through all the volatility are rich. But that's easier said than done. Amazon had several 50% drops and one scary 90% drop.
Imagine sitting on that 92% loss. Indeed, Amazon wasn't the only stock seeing losses of that magnitude. There were lots of internet stocks that cratered. Many of them never came back.
But in Amazon's case, the dramatic ups and downs would fade in importance over time and yield huge gains. Now, all you see is that magnificent chart, up and to the right.
4. One or two massive winners will make you rich
What's strange about stock picking is that you don't know which picks will turn out to be massive winners and which ones will produce complete losses. You might have some good (or bad) feelings in the short term. But the real game of amassing riches is what your stock does over a decade or two.
To be a successful investor, you need to take smart risks. Indeed, every stock investment is a risk, because you might lose your money. And then you have to be patient and let the story play out. Risk taking and patience aren't two character traits that usually go together. One of them will probably come naturally to you, and the other one you might have to work on.
Yet it doesn't take many stocks producing returns of 10,000%, 25,000%, or even 100,000% or more to make up for a whole bunch of 100% declines. Find those one or two winners, and they'll define your success as an investor.
The lesson here is obvious: If you find an amazing stock, keep it.
Investing is a very serious business
The toughest challenge in investing is understanding that paying too much attention to your stocks' performance can be just as damaging as not paying enough attention. If you focus on your companies and how their businesses are doing, you will be rewarded over time.
