The Motley Fool

The best investors are dead

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

This isn’t an article about investing legends that have come and gone over the years. Nor will I be proposing that this and future generations of equity enthusiasts will be unable to match the returns generated by long-departed ordinary folk. Rather, this is simply an opportunity to remind Foolish readers of the curious findings from a study conducted by Fidelity, the mutual fund and financial services group. 

From an analysis of client portfolios between 2003 and 2013, Fidelity found that their best investors were those who never touched their shares. But these weren’t investors with nerves of steel or those that somehow managed to pick winning shares from the outset. Fidelity’s most successful investors were already dead.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

Recency bias

When you think about it, such a finding makes perfect sense. When you’re dead, and your assets are frozen (at least while your estate is organised), you can’t do all that much about your portfolio. In other words, much of the reason living investors under-perform their less ‘active’ counterparts is that the latter can’t be affected by all the cognitive and emotional biases the former are subject to. One such bias is the recency effect

The recency effect has long been studied by psychologists. Put simply, the more recently something happened, the more likely we are to remember, focus on, and regard it as important. To use an everyday example, it’s why we’re more able to recall the last item on a shopping list than all the items before it. That last item sticks out, as does the first item (the primacy effect). 

Unfortunately, recency bias can be particularly problematic for investors. Our tendency to focus on things that have just happened can be what leads us to dispose of otherwise quality shares during periods of market panic.

When the oil price slumped back in January, for example, many people sold their holdings in Royal Dutch Shell and BP, believing that the oil price would take years to recover and dividends would soon be cut. Shell’s share price is now up 66% since late January and BP’s has risen 48% over the same time.

And when iron ore prices dropped following a slowdown in Chinese construction, shares in BHP Billiton — the world’s largest miner — dropped to 580p as the company slashed its interim payout. They’ve since doubled.

Make no mistake, recency bias can be bad for your wealth.

Stop tinkering

That said, the idea that an investor should simply buy a selection of company stocks and not check their value until their last breath is unrealistic. Moreover, most would contend that we invest to enjoy our wealth at a later date rather than pass it on. There’s little point being the richest person in the graveyard, so what are we to do?

It’s clear that investors need to avoid tinkering with their portfolios as much as possible. After all, the only ones to always benefit from excessive and emotionally-motivated buying and selling are the brokers we pay commission to. We therefore need to learn how to distinguish significant from non-significant events. This isn’t always easy, of course, hence the need to ensure that our portfolios are sufficiently diversified should the former occur. In order to avoid knee-jerk reactions to recent news, investors might also consider setting up stock alerts for companies they actually own.  This way, they neatly avoid a lot of market noise that could otherwise send them off course.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended BP and Royal Dutch Shell. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.