Want To Be A Better Investor? These 3 Tips Go Against The Grain…
Let’s face it: Much of what we’re told about investing (at least by the mainstream financial media) is just noise.
It’s useless or unhelpful at best, and downright harmful at worst.
The majority of novice investors out there are taught overly simplistic concepts like “buy low, sell high” or “buy and hold”. Sometimes, they can serve you well. Other times, the end up being just flat out wrong.
Every investor has different goals. We all know that, of course. But we also have different mindsets, risk tolerances, preconceived assumptions… I could go on and on.
Only on rare occasions will you come across a unique idea or approach that stands out above the rest. I like to think that several of our premium newsletters take unique approaches to investing that really work for our readers.
With this in mind, I spent some time thinking about some of the counterintuitive lessons I’ve learned about investing over the years.
Many of them come straight from our team of expert analysts. And some of them fly completely against what we’re taught about investing…
#1 Don’t Worry About “Beating The Market”
Every time the mainstream financial media crows about “beating the street,” it just fuels the worst instincts of investors. It makes you think there’s always someone out there doing better than you. It’s not healthy for your mind, and it’s not healthy for your portfolio, either.
The research firm Dalbar has shown that the average equity fund investor consistently underperforms the market. The latest data I could find said the average individual investor earned 4.25% a year over the last 20 years, compared to 6.06% for the S&P 500. Most of that underperformance is attributable to investor behavior — lack of patience, poor timing, etc.
Source: “Quantitative Analysis of Investor Behavior, 2020,” DALBAR, Inc.
There’s a reason why the pros call individual investors “dumb money”.
If the you spend less time worrying about beating the market and instead rely on sticking to a proven strategy year after year, you’ll often find yourself in much better shape than the crowd. And in a strange twist of fate, you may even find yourself beating the market by not worrying about beating the market.
A few weeks ago, my colleague Nathan Slaughter gave an update on how his High-Yield Investing premium portfolio has performed so far this year. I’ll give you a hint… It’s beating the S&P 500 — and arguably, that’s not even the goal.
Our income-minded readers seem to understand this best. I can’t tell you how many emails I’ve read from High-Yield Investing subscribers who say they couldn’t give a damn about beating the market. They’re in it for the income. End of story. But it just so happens that many of our longtime income readers have absolutely crushed the market.
Can you guess why? While I can’t peek into their personal brokerage statements, I’m willing to bet it’s for the same reasons why our income portfolios look so appealing (hint: the real standouts have been in the portfolio for close to 10 years, not 10 months.)
My advice: Instead of worrying about keeping up with the Jones’s, spend your time finding high-quality companies to own. I’m talking about companies that gush enough cash flow to grow their business and handsomely reward investors with rising dividends year after year.
#2 You Might Own Too Many Stocks
This one might get me in trouble with my publisher… But you probably shouldn’t buy every single stock our analysts recommend.
The truth is, I don’t think a single one of our analysts has ever recommended that. Yes, our premium subscribers are paying us for picks and analysis. But if you’re like the average investor, chances are you probably already own too many stocks.
Why? Let’s just say you choose to ignore point #1 and you really, really want to beat the market. Well, I hate to tell you this, but you probably ARE the market.
As Warren Buffett himself has stated, diversification is overrated. I don’t care what “portfolio theory” says. I don’t care what your financial advisor says. Simple mathematics bears this out. I won’t get too much into the weeds on this, but the truth is the more you own, the more your portfolio’s performance will look like the market. Part of the problem is that there are just too many choices out there for investors. As a colleague of mine once said, it’s like trying to drink from a fire hose.
Have money in Apple, Amazon, Microsoft, Facebook, and Google parent Alphabet? That’s 20% of the entire S&P 500 right there. Throw in just a few more stocks, and suddenly your portfolio will start perform very close to the market — but probably with even more volatility.
My advice: Assuming you have your 401k in some sort of target-date allocation or in an index fund, focus the rest of your investing on no more than a dozen really good ideas.
Here’s another radical approach you might want to consider… Take 80% of your funds and stash it in the Vanguard 500 Index Fund. Now take the rest and shoot for the moon. I’m talking about only picks that have the potential to deliver a triple-digit return minimum. I’m dead serious.
This sort of “barbell” strategy, when done properly, will likely insulate you from the worst of what the market can throw at you while still offering the chance to harvest the benefits of “high-upside” investments.
Check your investment account right now. Can you honestly say that those 32 positions (or whatever) you own really represent your best ideas? Buffett says he and his team can really manage a couple of really good ideas every year, if that. Can you do better?
Shrink your portfolio down to a manageable size. Put more money in your best ideas. You’ll find that it’s a lot easier to keep up with, and your performance will likely improve.
#3 Learn To Love Cash
There’s nothing quite like good, old fashioned, cash. Yet for some reason, many investors think they need to be all in, especially when the market is on a bullish run. I get it. Cash brings down portfolio performance. That’s another reason why you should stop worrying about beating the market. (See where I’m going with this? It just fuels poor behavior.)
An index is fully invested at all times. You and I do not have that luxury. An index does not own a house that needs a new roof. It doesn’t have a kid in college that decides she wants to pursue a Master’s. An index doesn’t need to pay for a wedding. Or a funeral. You get the idea.
We have a finite pool of cash to work with, and hopefully we’re adding to it gradually along the way. But then life happens and you need to access that cash. Alternatively, something like a global pandemic hits, sending the market into a nosedive. Suddenly, you’re looking at a once-in-a-generation opportunity to buy some of the market’s best names at fire-sale prices. But, oops… no cash.
I’ve had the pleasure of knowing some really talented gamblers in my life, and they the best gamblers seem to understand this better than most investors. Any card shark worth his salt will tell you that you NEVER have your entire bank roll in play, no matter how favorable the odds may be.
That’s because you always need to be able to live to fight another day.
Cash is not the enemy of a portfolio. It’s your friend. You should be raising cash by selling positions here and there when things are going well — not when the market is tanking. That way, if a selloff happens, you’ll be ready to strike. Instead of worrying whether or not you have enough cash at work in the market, be thinking about how to add to your cash pile.
None of the things we’ve discussed here are meant to be the final word on anything. They may or may not apply to you. But they do address some of the common flaws in thinking I’ve seen many investors take in their approach to the market.
How do I know? Because I used to do the same thing…
Investing isn’t always easy. But these concepts have served me well over the years, and hopefully they’ll get you thinking about your own approach to the market and whether any changes are in order.
In the meantime, there’s something really exciting I want to tell you about…
We’ve all heard about SpaceX — but have you heard about Starlink?
Elon Musk’s secretive project is about to go “live” soon — and it could be the latest game-changer from the billionaire entrepreneur…
My colleague Jimmy Butts has a full report on what’s going on — and why he thinks Musk is going to slowly take a step back from Tesla – and go “all in” on SpaceX (and Starlink, in particular).
If there’s one thing we’ve learned, it’s to never count out Musk… And the spectacular returns that could follow this project could be just as impressive as his other ventures.