Relax. Deep breath. Take your time. Too many people get investing wrong. They race around, loading up on stocks they hope will thrash the market, and make possibly the biggest single investment mistake of all. They become impatient.
Time is on your side
Billionaire investor Warren Buffett saw the danger. Years ago, he said “The stock market is a device for transferring money from the impatient to the patient”. As ever with Mr Buffett, these words are as true today as they were then.
The stock market booms of the 1980s and 1990s gave people the wrong idea. That’s when the get-rich-quick mentality really took hold. It survived the dot.com crash in 2000, or at least it did in my case. I remember buying British technology hero ARM Holdings in 2003. It went nowhere for three months – a whole three months.
So I sold it.
Over the next few years, ARM turned into a 10-bagger. It could have turned my £2,000 into £20,000, if only I hadn’t been so impatient. I learned my lesson.
The stock market is a great way to get rich – slowly. Successful investors like Mr Buffett realise this. The good thing about having a get-rich-slow mentality is that it is a lot more soothing than frantically trying to pick winners, and the chances of success are much higher. Instead of trying to beat the market, something that is very hard to do consistently, you are simply rolling along with it, as it steadily builds your wealth.
Some people like to do this in a really simple way, say, by investing in a low-cost exchange-traded fund tracking a major index such as the FTSE 100, and leaving it there. Vanguard’s FTSE All-World UCITS ETF is popular among those wanting global exposure.
Alternatively, you could build a balanced portfolio of individual companies free of tax using your Stocks and Shares ISA allowance.
Put those dividends to work
Whichever you prefer, you then need to do two things. First, invest as much money as you can spare, either in lump sums or regular monthly payments. The latter is particularly attractive, as then you do not need to worry about stock market volatility. In fact, you turn it to your advantage, as your monthly payment buys more stock when the market is down, which will be worth more when share prices recover, as they eventually will.
The second thing is just as vital. Right now, the FTSE 100 is packed with stocks yielding 5%, 6%, 7% or more, and what you need to do is reinvest that money back into your portfolio, to buy more stock or fund units.
The average annual return of the FTSE 100 over the 10 years to December 2019 is an impressive 8.3%, with dividends reinvested. If you take them instead, it falls to 4.3%, roughly half that amount, as figures from IG show.
The longer you stay invested, the longer your money can roll up. You can also tune out the noise of daily stock market swings.
Patience is a virtue. Perhaps the ultimate one.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.