Being a better, more successful investor is within the grasp of all of us. However, we can make it hard for ourselves in a variety of ways.
Last year the newspaper USA Today spoke with the world's fourth richest person, investor Warren Buffett, for tips on how to grow rich and what he thought were the three biggest mistakes investors make. The simplicity of his answers show just how much easier investing could be. Like a sports team, it is not the big blunders but the little tweaks (less fumbling, more score conversions, etc.) that can make the difference over a lifetime of investing.
Number 1: Avoid timing the market
Trying to predict where the market will be in a short time period can lead you to so-so stocks and low performance. If Woolworths Limited (ASX: WOW) has one great half year result, that's no reason to pile into it. However, if you really know Woolworths, you can see it has a regularly good track record for growth and attractive share price gains over many years. That's the reason why you might want to buy Woolworths. If this multi-millionaire can't time the market himself, what hope do you have?
Number 2: Trying to mimic high-frequency traders
Actually, the more frequently you trade, the lower average performance you achieve. Worse than number one above, Buffett calls this one a big mistake. It goes against the idea of compounding returns if you are just trying to jag off a percent here and a half-percent there of gains. You have to have many more "good ideas" for stock trades and invariably most of them will be either wrong or improperly timed. Stick with high quality stocks that pay handsome dividends like Woodside Petroleum Limited (ASX: WPL) with its very generous 5.8% dividend yield and you'll have much more years from now.
Number 3: Paying too much in fees and expenses
This is the silent thief of better returns because paying more than we need to means the extra cost takes away that money's ability to earn more money over the long term. One dollar at 8% compound interest over 20 years could be worth $4.66, so even that can't be squandered. It's like the old saying, "take care of your pennies and your pennies will take care of you". Management fees, commission costs, account expenses all add up. By holding stocks for longer periods of time, you can reduce transaction costs.
