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Revealed: The most important lesson in investment

by , 09 December 2013

Most of the mistakes that you have made, are making, or ever will make as an investor, boil down to worrying too much about short-term performance. So if you want to be a successful investor, think long-term. Read on to find out more about this most important lesson in investment…

That sounds easy, John Stepek in MoneyWeek explains... In fact, you probably already think you do think long-term.

Yet everything in the investment world, and everything in your own psychological make-up, goes against long-term thinking.

A friend tells you that he made a load of money by backing some little biotech stock or some gold explorer. Even though you know at the back of your mind that even if he’s telling the truth, the rest of his portfolio is probably up the creek for the year, you immediately feel a pang of envy, and the need to compete. So you go out and buy some equally dodgy stock, and it doesn’t pay off.

Or you watch the rolling financial news. There’s a lot of red on the screen. All the pundits are talking about another impending financial crisis or the US sailing over the fiscal cliff. The share you bought just last week has taken a pretty heavy hit. And although you bought it ‘for the long run’ and nothing has changed, you sell in a panic.

This chopping and changing because of short-term noise is probably the cause of more investment pain than anything else. Indeed, Tadas Viskanta who writes the Abnormal Returns blog, even suggests that “consistently following a sub-optimal investing strategy is far preferable to flitting from hot strategy to the next”.

Make sure you write down your investment goals

It is not your aim to make a 20% return by the end of next week, or even the end of next year. Your goal is probably to make enough to retire comfortably, or perhaps to send your kids to school or varsity. Whatever the goal is, write it down.

Remember: Every time you make an investment, it costs you some of the money that you’re meant to be saving. You need to earn that cost back before you even start making a return. That makes it just that little bit harder to reach your end goal. So you need to have a really good reason to make an investment.

As long as you keep your long-term goals in focus, it will be harder for irrelevant outside events to distract you from the task at hand.

You’ll still make mistakes, of course. The good news is – as Viskanta notes – that according to at least one recent Harvard research paper (from John Campbell, Tarun Ramadorai, and Benjamin Ranish), investors can learn from their mistakes. The team looked at investors in Indian equities, and found – in short – that the longer an investor had been investing, the fewer common investment mistakes they made.

The sooner you start investing, the sooner you’ll start learning. So what are you waiting for?

So there you have it, the most important lesson in investment.

Revealed: The most important lesson in investment
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