The start of the year is the perfect opportunity to focus on how to build our wealth and put us on a path towards financial prosperity. For the vast majority of us, the best way to achieve our financial goals is by investing in the stock market.
With that in mind, I’ve put together three simple steps to improve investment performance in 2020… and I think Warren Buffett would agree.
1. Invest regularly
A good way to build future wealth is to get into the habit of investing in the stock market regularly. I recommend investing a set amount at the beginning of every month, into FTSE 100 mega-cap stocks in particular.
Regular investing means that we don’t need to worry too much about the cyclical nature of the stock market. Instead, our entry points are averaged out over longer time frames. This makes it more likely that we will not invest all of our funds at the top of the market – when share prices are less likely to rise.
Of course, we still need to make sure that we pay careful attention to valuations and don’t overpay for stocks. For best results, invest in a different stock and a different sector, every month, and consider throwing in some global index trackers for good measure, to make sure investments are well diversified.
2. Buy and hold
While I advocate investing regularly, I don’t recommend selling regularly. Warren Buffett, arguably the most successful investor of all time, famously said “if you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes”.
When we invest in a stock, we should already have done the upfront research that gives us a conviction that a particular stock is a good long-term buy. Short-term stock market dynamics should not affect this conviction.
Excessive buying and selling of stocks results in higher trading costs, effectively suppressing investment returns. What’s more, investors who only hold stocks for short periods of time miss out on what is in effect the stock market’s greatest power – its ability to compound returns over time.
Investors buy stocks and then hold them, with a belief – based on company and market fundamentals – that a company’s earnings will increase in the long run. Those that buy and sell frequently, and hold stocks for only short amounts of time, are more like traders, betting on short-term price movements.
3. Keep calm and carry on investing
With up-to-the second 24-hour news and media sensationalism, it often feels like current geopolitical and economic developments are unique, and that the world is about to end. The reality is that every year is full of drama, and 2020 will be no different.
The stock market has consistently demonstrated its ability to gain value through a wide range of different scenarios. In fact, the vast majority of what at the time seem like big news stories, do not actually affect the market at all in the long term.
It goes against human nature, but if we all just remain a bit more rational, ignoring external noise, and continuing to invest in times of uncertainty, then our investment returns would be the better for it.
