Your investments: Achieving long-term financial success

I recently met a very wealthy family that never used a financial adviser, choosing instead to do their own investing based on what they described as “getting good tips and then doing our own research.”

When I asked them how they had done, they told me that they never achieved much growth in their investment portfolio. After doing some more probing, they felt that investing was easy (even though they had little success); they trusted their friends who gave them the tips; and they didn’t want to pay fees that a financial adviser would charge. So to save a few hundred or thousand dollars in fees, they ended up losing literally hundreds of thousands of dollars in portfolio growth over the last few years.

Limitations

Warren Buffett, widely regarded as one of the greatest investors of all time, tells investors that the best advice he can give them is to know their limitations.

He means that investors should be aware that their chances of performing better than the major averages are statistically small if they pick individual stocks.

If professional stock pickers aren’t able to beat their benchmarks, why do individuals think they can do better? Over the long-term it’s extremely difficult to outperform the market. In fact 90 percent of mutual fund managers are unable to beat the market on an annual basis, how much more so on a long-term basis.

Don’t get too cute

Whether it’s trying to “outsmart” the stock market by trying to find some kind of cute reason that no one has ever thought about, or the fact that individuals tend to panic when the market drops and they sell their stocks and then only buy back once the market has recovered (the opposite of buy low and sell high), there is plenty of research that shows that individuals who try and time the market buy frequent trading, tend to under-perform board market indices.

The key to making money in the stock market is not trying to outsmart the market, but by investing broadly with a long-term horizon. Not to overdose on clichés but there is another famous investing saying: “It’s not timing the market, but time in the market,” which is the best way to build wealth.

No shortcuts

One is not going to build wealth buy simply investing a small sum and hoping to keep hitting home-runs. You’re not going to keep finding the right stocks and double your money. Anyone who promises this to you is unethical.

There is no shortcut to building wealth. You need to start investing, and with discipline, keep depositing more money and with the wonders of compound interest and the growth of the stock market, over time you will create a comfortable nest egg.

It takes time

We just read in the weekly Torah portion how the Children of Israel were punished and forced to wander the desert for 40 years. The question is asked why they had to wander for 40 years: Couldn’t Hashem have brought them in immediately? The Malbim answers that they weren’t ready. In Egypt they had reached the lowest level of impurity.

It wasn’t possible for them to suddenly become so pious overnight, as their travails and mistakes in the desert proved. They needed time to slowly purify themselves. Only then, would they be ready to enter the Holy Land.

The same holds true for investing. It’s virtually unheard of for someone to accumulate wealth overnight; rather it’s a process that takes many, many years.

The key to long-term financial success is to start investing as soon as possible and stick to a plan.

aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.