The stock market bug first bit me in 1990. I became obsessed with analysing companies to work out whether the price of their stock would go up, down or sideways. I devoured annual reports, financial newspapers, magazines and books on investing.

However, out of fear for messing up, I still did what status-quo wisdom advised: put my money in managed funds. But when the spreadsheet I’d built on my state-of-the-art DOS computer revealed how much I’d pay in fees over the next 30 to 40 years, my jaw hit the ground.

And then I worked out that the best long-term returns that managed funds achieved of around 8.5% annualised, would not grow my regular savings by enough to build a nest egg to last my retirement years. I was flabbergasted.

There had to be a better way. So, I put my computer science and mathematics degree to work and spent more than 5000 hours over the next 8 years working out an efficient way to generate higher returns from the stock market to catch up for the underperformance.

What follows are the five most important lessons I have learned along my 30+ year investing journey. I hope they help you with yours, whether you are already retired, or close to it

1. Begin with the end in mind

Henry Kissinger once said, “If you don’t know where you are going, every road will get you nowhere.” Having an Investment Plan in place before investing even one dollar into the market is a must. This single action will help you stick to your guns when the 24/7 “noise” of commentators, geopolitical angst, and the latest “hot tips” steer you astray.

When I was young, I had lofty goals of beating the market by double digits. But with my homemade spreadsheets on hand, I soon realised that even modest outperformance will compound nicely over time. “The miracle of compounding” is quite real. If you set a goal of beating the market by between 2% and 5% annualised (meaning, averaged out over the years), you’ll be on track to enjoy a comfortable retirement.

This means achieving 12% to 15% annualised returns over the long term. Set the goal, write the Plan, then start…

2. Investment mistakes compound

This could be the most painful lesson. People assume compounding only works for you, but it will work against you too.

Here’s how I’ve watched compounding burn investors over the years:

  • Managed funds and financial adviser fees
  • Being fully invested during downturns.

Let’s start with the fees. John Bogle, founder of Vanguard, put it best. He said…

“The investor, who put up 100% of the capital and assumed 100% of the risk, earned only 31% of the market return. The system of financial intermediation, which put up 0% of the capital and assumed 0% of the risk, essentially confiscated 70% of that return—surely the lion’s share. What you see here—and please don’t ever forget it—is that over the long term, the miracle of compounding returns is overwhelmed by the tyranny of compounding costs.”

This is exactly what happens when you pay financial advisor fees & platform fees of around 1% to 1.5%, and managed fund fees of around 0.5% to 1.5%.

The second way compounding can hurt investors is the impact of downturns on their portfolio. Over the lifetime of most investors, they will experience around six major market corrections (meaning, a drop of 35% or more in the overall market).

While the market recovers over the long haul, the average portfolio won’t perform as well as if it had been sheltered from the loss. This alone, keeping the bulk of one’s portfolio safely in cash during these times, can catapult returns to around 12% annualised, over the long term

3. Always step back and see the big picture

One of the biggest mistakes that investors make is to overreact to short-term volatility in the market. This is so often caused by over-the-top journalists and market commentators, who themselves suffer from ‘recency bias’, just as everyday investors do.

Having a big-picture perspective and 10,000-foot bird’s eye-view of how the stock market moves in long-term trends, in both directions, is critical to learning patience and achieving superior long-term returns.

With all the accessible stock price data available these days, it is so much easier to gain a big-picture trained-eye than it was 30 years ago.

4. Myth: “You can’t time the market”

Everything in life is so much better through good timing. Whether telling a joke, hitting a golf ball or crossing the road.

Yet, for decades people with vested interests have indoctrinated amateur investors that the stock market is the only thing that can’t be timed. And, therefore, you must invest your money with them…

This has been demonstrated to be untrue over and over again by so many.

Including by myself. By opening up a real-money portfolio for the public to see, that has achieved 15%+ annualised returns. The portfolio uses unambiguous timing to buy and sell large-cap stocks that are held, on average, for around 4 months each.

5. Responding is a step ahead of predicting

The final key, whatever approach you choose, is to be objective and consistent.

Market volatility is as certain as death and taxes. Instead of always looking ahead to try to foresee what will happen, use a method that allows you to listen to the market and respond to what is happening now, rather than what may happen.

Trying to be objective and consistent about what may happen in the future is a fool’s paradise!

The strategy I use, composed over 25 years to 2015, has allowed me to overcome the many investing obstacles I’ve encountered, including the:

  • subjectivity of analysis and trying to predict,
  • massive time commitment and the company data delays with value investing,
  • emotional rollercoaster ride of knee-jerk reacting to volatility, commentary and “noise”.

The chart below shows the outcome of my open-book portfolio over 5.5 years, which takes me around 15 minutes a week to manage.

The portfolio is beating the broader market by 9.42% annualised, much more than the goal of outperforming by 2% – 5% annualised.

SPA3 Investor ASX Portfolio | Comparative Performance 1 Jan 2016 to 30 June 2021

The dark-blue line is my open-book portfolio’s plotted daily value from 1 January 2016 to 30 June 2021. Return: 19.73% annualised.

The black line is the ASX200 Accumulation Index. Return: 10.31% annualised.

The confidence to execute the strategy objectively and consistently comes from decades of data and trade-research conducted prior to 2016 that determined the reliability and robustness of the unambiguous buy and sell signals.

Now these sorts of returns can be replicated by anyone. But over the years I’ve found that individuals who possess certain key attributes are more likely to succeed than others.

If you’d like to find out how to become a more consistent and competent long-term investor, download your FREE eBook today.

Author: Gary Stone
Founder, in 1995, and Managing Director of Share Wealth Systems, Gary released his first mechanical investment strategy in 1998. Using his education in computer science and mathematics, the algorithm he developed is used by investors worldwide. Gary is the author of Blueprint to Wealth: Financial Freedom in 15 Minutes a Week. (PS: Chapter 7 also demonstrates that timing the market works.)

This is a sponsored article produced in partnership with Share Wealth Systems.