Building Wealth Slowly.
I was speaking with a young professional the other day about a range of investing topics. One topic that came up is whether it would be worth it for him to learn how to pick his own stocks.
This is a topic I feel strongly about. Despite what The Motley Fool might say, my strong opinion is no, you should not be picking your own stocks especially if you are a young and upcoming professional. You might think this is because I am a financial planner and have a “leave it to the professionals” opinion. You would be wrong.
The problem with picking your own stocks is it is one of the most competitive industries on earth. You are stepping into the ring with Mike Tyson every day, competing with a multi-trillion-dollar industry of people paid a lot of money to try and outperform the market for their investors. It is extremely hard to outperform through skill alone. I would guess that for almost all individual investors (and most professional investors) that successfully beat the market over a length of time, there is a large proportion of luck involved. Being lucky is not an investment strategy.
But let’s assume it is possible to reliably beat the market. How much time would be involved? 10 hours a week? 20 hours a week? Remember you are competing with people who do this as a full-time career.
Let’s use some examples below to illustrate my point. Firstly, we have a client number 1 who invests $1,000.00 a month for 30 years in the market. They achieve the market rate of return over that time which historically has been about 10%. At the end of this 30 years, they would have $2,064,399.98. Not a bad result!
Here is the summary below:
Now imagine you have put in the work and have been able to outperform the market. Let’s say after all of this work you manage to average a 1% outperformance over the market over a 30-year period, which would be a great result. This is 10% better per year than the market rate of return. What difference would these 20 hours a week of work for 30 years make?
Client number 2 invests $1,000.00 a month at a market beating 11% for 30 years and ends up with $2,508,658.17. This is $444,258.20 more than client 1 has. Who wouldn’t want an extra $444,258.20 extra for retirement? Well, client 2 has put in 20 hours work a week, 52 weeks a year for 30 years. This is 31,200 hours work for a return of $14.24 an hour. You could earn more bartending. Let’s compare him to client 3.
Client 3 does not worry about trying to outperform the market. They are happy to just take the market rate of return and go about living their life. They are however serious about investing and commit to investing more. They decide that they are going to invest $1,500.00 a month, $500.00 more than clients 1 and 2. They might get this $500.00 a month by tightening the belt and spending less money, they might get a second job, they might get a pay rise at work. It doesn’t matter how they raise this extra $500.00, just that they do.
Client number 3 invests $1,500.00 a month for 30 years in the market. They achieve the market rate of return over that time which historically has been about 10%. At the end of this 30 years, they would have $3,096,599.98! This is $587,941.81 more than client 2 (who had better investment performance) and $1,032,200.00 more than client 1!
What I told the young professional was that in investing, increasing your contributions is the easiest and most reliable thing you can control to influence investor success. I told him that his time would be much better spent working on his career and earning more so he can invest more. Automate your contributions, do it consistently, increase them aggressively and watch the magic of compound interest take effect.
It will make a world of difference.
