By Craig Erwin, Ph.D.
My 18 year old just opened a brokerage account. He quickly bought a dab of cryptocurrency, a few stocks, and an Exchange-Traded Fund (ETF). An ETF is similar to a mutual fund (a basket of assets). According to Wikipedia, “ETFs are bought and sold from other owners throughout the day on stock exchanges” and they contain assets such as “stocks, bonds, currencies, futures contracts, and/or commodities such as gold bars”. My son’s ETF contains stocks.
Since my son checks his portfolio at least once an hour, I caution him that, the more he checks his account, the more likely he will lose money. Why? Because the more frequently he checks, the more likely he is to trade and the more frequently he trades, the more likely he is to make mistakes. Mistakes can be costly and they pile up. My son will probably learn the hard way. But that’s when lessons stick – when you learn the hard way.
My son reminds me of myself during the dot-com era of the 1990s. I traded frequently, checked my portfolio frequently, and was obsessed with the stock market and the journalists who spewed forth an endless number of analyses, predictions, and recommendations. Did my obsession pay off? No. I would have been better off ignoring my portfolio.
Warren Buffett, a highly successful investor, knows investing success has nothing to do with trading. He may go months without making a trade. He tends to wait until the time is right to buy a company’s stock and then holds the stock forever. He does sell stocks from time to time, but he is more prone to buy and hold forever. If you weren’t paying attention, you would swear he never does anything.
The best approach is not to trade, but to buy and hold forever. We are highly unlikely to pick stocks as well as Buffett, so the best approach is not to buy individual stocks, but to buy mutual funds or ETFs regularly. Buy them like clockwork, every week or two weeks, or every paycheck. When should you sell? After you retire. If investing is thrilling, consider another approach. Investing should be boring.
If you dollar-cost average, you will be bored by the monotony of having the same amount taken out of every paycheck and invested in the same mutual fund paycheck after paycheck. It may be boring, but it is a proven, low-cost, low-maintenance path to wealth.
Do you find investing boring or thrilling? How regularly do you save and invest?
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