It is easy to believe that duplication of stocks is an easy way to build wealth. The financial media highlights the biggest winners of the market. Many brokerage firms offer unlimited trades without a commission as well as tools that often encourage trade. Together, they send a message: You’re not doing enough, or not doing well enough fast enough.
Such a mindset is a trap in the end, though. Too many people, in their quest to “get rich quick,” end up doing more harm to themselves than good. Difficult decisions lead to costly mistakes.
With this as a backdrop, here are four tips to help you make more money in the long run, but with less work than you do now.
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1. With trade, less is more
You may hear stories about fellow traders scoring big gains in a short time. Just know that these success stories, if true, are the norm. While estimates vary slightly from one source to the next, around 90% of traders – usually pattern day traders – lose money from their trading activities.
Why not hear about most of these people? Broker firms certainly don’t want to intimidate potential buyers, but it’s not a very lucrative fact for the investment media industry either. It’s a powerful idea, even though the statistic is frighteningly misleading in itself.
The solution is simple, don’t try to get over the market. Most of your benefits should come from the long-term tidal cycling of the market.
2. Do not take too many P / E ratios
The logic is sound enough. The amount of money you put into investing in a company’s stock should be measured by each company’s current and potential profits. The lower the price-to-earnings ratio (or P / E ratio), the more you can get for your buck.
The fact is, however, there is little correlation between low P / E ratios and stock performance. Low priced stocks usually remain as low priced stocks, while relatively expensive stocks are usually still expensive.
That is not to say that investors should never think about valuations. But high valuation is not always a breaker.
Fun fact: In his book How to make money in stocks, William J. O’Neil (of the Daily Business reputation) explains seven test and validation criteria for selecting winners. None of these seven standards considers employment-based valuation.
3. Think about your entire package
While not without the ups and downs, NVIDIA (NASDAQ: NVDA) has been a big winner lately. Ditto for competitor Advanced advanced tools (NASDAQ: AMD). Even sections of Intel (NASDAQ: INTC) has pushed past the company’s furnace challenges to eliminate benefits; the stock hit just high. Investors would do well with any of them.
That does not mean that an investor should own all of them at once, however.
Admittedly, this situation is an extreme case of over-focus in one area, and insufficient multiplication. But less common collections are not common. Amazon (NASDAQ: AMZN), Google Parent Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG), and social networking giant Facebook (NASDAQ: FB) they all look like different companies on the surface. Under the hood, however, these three stocks are apt to rise and fall together as they all depend on the financial health of the same consumers.
In other words, diversification … not only at the departmental level but at the style and divisional level as well.
4. Don’t bother trying the time market
Finally, as embarrassing as it can be, resist the urge to put money out at a rate similar to a high market. At the same time, don’t wait to step into a new situation until you think we are at a low or close level. The uptake of these efforts is low. In fact, it is very likely that you will find anywhere close enough to them to do you any good.
And losing the signal by just a day or two can be more devastating than you might think.
Take last year for example. The S&P 500 It managed to make a good gain of 16.3% in the 2020 calendar, surpassing steep sales in February and March which finally ended on March 23rd. Two of the top three days for the S&P 500 last year were March 24. and March 26. If you take those two-day benefits out of the mix, the index would have gained less than 5% in 2020.
By permission, if you had also missed the worst day last year (sales suffered 12% on March 16), the gain is working its way back up to 15%. You’re talking about celebrating the results of one day and the most likely pivot point while in the midst of a political and emotional pandemic, though. That’s just not going to happen.
Tap the headache. Just take your bumps and enjoy the relapses, realizing that time will heal all injuries.
This article represents the opinion of the writer, who may not agree with the “official” recommendation position of the Motley Fool chief consulting service. We are motley! Questioning an investment dissertation – even one of our own – helps us to think critically about investing and make decisions that will help us become softer, happier and richer.