27 Aug The Single Biggest Mistake Investors Make

I have been talking to retail investors for over 13 years now. I’ve been with them through a Global Financial Crisis, a huge bull market and a sudden Pandemic drop, and I have noticed one big difference between successful investors and those that never quite make any profits.

Patience.

The stock market is not a get rich quick scheme and just because you can see stock prices change every day, does not mean you need to act every day.

If you were to go out and buy an investment property, how long would you hold it? A few weeks? As long as 6 months? Or would you be thinking – I’ll hold this for years, from the outset?

Investment property is probably the single biggest wealth creator for the average Australian. But it isn’t because property is some kind of magical investment that only ever goes up. No, it is because when investors buy property, they do so thinking they will hold it for years, not weeks or months.

What would happen if we did the same with stocks?

To find out, I did some analysis using the S&P500 index. I went all the way back to 1928 because I wanted to see some long-term trends. Here’s what I found.

The odds of the index price being higher on any given day is 52.43%. That is just a 2.43% difference to a flip of a coin. But it does show what even a minor advantage can do when compounded enough times.

If you look at all 5-day periods, the rate of positive returns goes up to 56.17%. Going out to a 1 month hold the rate jumps to 62.78% and with a 1 year hold a positive return has occurred just over 75% of the time

Things get really interesting at 2 years when the positive return jumps to 82.45% of the time.

Here are the results for all the time periods I tested

The point at which this data hits 100% and stays there is 16 years.

Interesting Matthew, but what do I do with this information?

 Change your time horizons for expected profits.

If you buy some stocks and have not made any money after three months, then there is nothing wrong. In fact, this will happen one time out of every three. One in three is a large proportion of the time. If you don’t like losing money one in three times you try, then all you need to do is change your time horizon.

Doing the same thing but looking after two years instead of three months changes your chance of success dramatically.  Judging returns after two years should mean you see gains eight times out of 10.

If I said to you which of these two investments do you prefer?

1. The chance of loss is one in three
2. The chance of loss is two in then

It is pretty easy to decide. The best bit is it isn’t a complex strategy. All you have to do is think longer term. You would do it with real estate. Why can’t you do it with stocks?

We are often our own worse enemies when it comes to stocks. We monitor them too closely and expect profits all the time. We have no patience to let the stocks make us money. We demand they make us money NOW!

Of all the investors I have spoken to in my time doing this, overwhelmingly the ones who do the best, hold their positions the longest. The above numbers prove why that works. The best investors accept there will be sideways periods and there will be down periods. Both are normal in the short term and to be expected.

The next time you find yourself thinking “This doesn’t work, I’m not making any money” ask yourself “How long have I given this? Am I expecting too much?” if it has been less than two years, (ok – less than 12 months for all you impatient people out there) then the chances are there is nothing wrong with what you are doing. Only your expectations are wrong. And if your expectations are wrong then you will never generate the returns you want.