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Why are most people, not good investors?

What are the key characteristics that distinguish good investors?

There are various answers to this question, but as a financial planner with over 20 years of experience, I have identified the key traits of successful investors.

Nowadays, the buzzword is immediacy. People expect accurate and quick responses when searching for information on Google or using Artificial Intelligence (AI). The idea of waiting for what you want is no longer fashionable.

A lot of individuals believe that the investment industry should have a similar system where they can invest and quickly become wealthy.

Recently, during a conversation with a potential client, he told me that he wanted to earn the highest return without any risk and as soon as possible.

Although it is true that, in our new world, everything is faster

Similar to the laws of physics, the realm of investments also has its own set of laws that cannot be violated at will.

The higher the return, the higher the risk; so those offers that say you are going to earn an excellent rate of return on a guaranteed basis.

This is just a marketing scheme where the person who profits is selling it to you, not investing in these unrealistic ideas.

Compound interest, or yield on yield, is the most powerful wealth-building tool, but you must give it time.

Studies show that part of the success of Warren Buffett’s fortune is that he bought his first stock when he was only 11 years old, and today he is more than 92 years old.

So, while he has managed to be an excellent investor, one of the factors that has helped him the most is the number of years he has invested his capital and has been reinvesting and growing over time.

One of the factors that have helped him the most is the years in which he has invested his capital and has been reinvesting and growing over time.

Chart with the evolution of Warren Buffett's fortune investing
Source: Advise Financial

Suppose we wish to have more evidence of the pursuit of immediate wealth in most cases. In that case, we can share the following statistics of the results of many of the non-professional investors:

During the pandemic, it became fashionable to do Day Trading

it is the activity of buying and selling stocks through different applications with the illusion of becoming a millionaire quickly. Many people began to speculate about their life savings.

Without knowing that, once again, the risk-return law is fulfilled, and according to a study conducted by the investment platform Etoro, 80% of these so-called Traders lost their money when analyzing their results in one year.

But what most people see is the odd case where it says that a lady or gentleman made millions with these speculative strategies from the comfort of his or her home. But they do not show the thousands of cases in which people lost their savings.

Another study published by CNBC ratifies the above and points out that when analyzing different periods, this percentage can reach 85%; for every ten people, more than 8 lose their money when trying to speculate in the stock market.

By the way, this same study reminds us of the words of Princeton professor Burton Malkiel, author of the book; “A Random Walk Down Wall Street,” who says investing differs from speculating.

When investors, diversification, and rebalancing are considered, trying to predict where the market is going is avoided, and instruments such as ETFs or Exchange Traded Funds are used.

Many of you may say yes, of course; what happens is that these are amateur investors. But professional investors can obtain better results in this speculative game of selecting which is the winning stock.

But it turns out that the evidence is not favorable for professional investors looking to speculate either. For that, we will share the results of the SPIVA report conducted annually by the S&P Dow Jones research unit.

Where they compare those professional investors (active mutual fund) who invest in both stocks and bonds; against their benchmark indexes or targets and show us the following:

Over 15 years, 93.40% of these active or professional investor funds failed to beat the index or target indicator.

Investments: active or passive management
Source: SPIVA®

This tells us that the investor would have fared much better if he had placed his money in an ETF fund that copied the index.

But, if you want to buy U.S. stocks, history shows that you would have been better off buying an ETF that clones the 500 stocks that represent the S&P 500 index (the 500 largest U.S. companies) than if you had hired someone to pick out the best stocks for you according to their expert judgment.

Why do most investors not follow the advice of academics, Nobel laureates, and historical evidence and continue falling into the short-term wealth trap?

And for me, the answer is straightforward: this short-term vision makes people need a direction or a goal for their investments. So they start to worry in the short term when we have already seen that investments must be given time.

So, the best methodology investors apply is to link their investments with their long-term goals; for example, if you say that this money I am investing is for my retirement.

So there we have that the view changes entirely and if you invest in a broadly diversified, low-cost portfolio. Your concerns are different from what might happen in a month, a semester, or a year from now.

For example, on average, a person who invests at age 50 has 15 years left before retirement and then retired can spend another 15 years. We would be talking about an investment of 30 years. Where it matters little what might happen in a week or a month.

Instead, someone investing in this way should pray or wish that during his savings period. There will be sharp drops in the stock market so that he can buy more units or shares at a lower price, use them little by little in his retirement, and comply with the other stock market laws.

A good investor: buy low and sell high.

So, each investment portfolio should always be linked to the goal you want to achieve and thus determine the time your money will be invested. If you save for your children’s education and they are ten years old, you know you are investing for eight years until they turn 18.

And for those who think they are investing to pay next month’s rent, thinking that the stock market is like a casino, we have already seen that the odds play against you and that usually the casino wins. So, always look for medium to long-term goals.

Alonso Rodríguez Segarra
Alonso Rodríguez Segarra
Founder & CEO Advise Financial advise-financial.com Alonso Rodriguez Segarra is a “CERTIFIED FINANCIAL PLANNER™” named by Investopedia among the Top 100 Financial Advisors in the USA  with more than 20 years of experience. His specialty is helping those people who want to plan for their retirement or optimize their retirement, with Hourly Financial Planning always looking for the best for his clients, under fiduciary criteria.

1 Comment

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