Monday, September 15, 2014

Most Successful Individual Investors are INACTIVE Investors ... They Don't Make an Easy Thing Hard

Investing for the long haul by individuals should be easy. We simply need to save regularly and invest a portion of those savings in the shares of quality companies. And then we can sit back, relax and watch our assets grow (due to compounding and the rule of 72 over time).

Unfortunately, that's not what most people do, and their commission earning advisers help keep them nervous and much too interested in trading based on short term market moves. In my view, that's not the formula for individuals to achieve investing success. Not even close.

So what is an individual saver and investor to do to achieve success? Well, following the general rule of saving regularly, investing those savings in quality stocks and then doing nothing works really well. And besides that, it leaves us with lots of worry free time to do lots of other and more interesting things with our days, weeks, months and years.

The Virtues of Inactive Investing has the magic formula for individuals to achieve long term investing success:

"And investing is one of those rare human endeavors where effort doesn't necessarily pay off anyway. Taking a hiatus on trading one's account may actually be helpful to a portfolio's returns.

An interesting piece on the DailyFinance site makes the case for sloth, to a degree.

Is Sloth an Investment Virtue? . . . studied which customer investing accounts performed the best:

They were the ones held by people who had forgotten they even had ... accounts, and so did no buying or selling from them. . . .

Solin writes that a number of studies support a strategy based on inactivity. The one he found most compelling analyzed 80,000 yearly observations of institutional investment assets, accounts and returns from 1984 through 2007.

"As you can imagine, there was a lot of buying and selling over this period," he writes. "But the study concluded that portfolios of products to which money was allocated underperformed compared to the products from which assets were withdrawn. Translation: They bought losers and sold winners....

But don't toss those unopened financial statements in the trash just yet. Solin points out that neglect can only be taken so far before it gets dangerous. . . .

He concludes: "The real takeaway from the data extolling the virtues of neglect, or even abandonment, of your portfolio is that efforts to time the market, select mispriced stocks or identify the next "hot" mutual fund manager are likely to do more harm than good."

My takeaway is that there's a big difference being leaving an account alone -- that is trading less -- and ignoring that account outright. Best to never do the latter while taking a mindful approach to the former."

Summing Up 

Amen to all of the above. For individual savers and investors, patience is a virtue. That said, engaging in watchful waiting is necessary as well.

So the best approach is to save and invest for the long haul, and not to get nervous and upset about short term market moves to the downside.

Pay attention to what you own and know the difference and distinction between owning shares of a good company for the long term and "playing the market" in the short term. 

Investing is not a game to be "played" in the short term. It's a serious and effective way to prepare for a comfortable "oldsterhood."

As Warren Buffett says, the stock market is a voting machine in the short term but a weighing machine in the long term. So weigh in occasionally but not too often.

That's my take.

Thanks. Bob.

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