It’s easy to believe that dabbling in stocks is an easy way to build wealth. The financial media highlights the market’s biggest winners. Many brokerage firms offer unlimited commission-free trades as well as tools that encourage frequent trading. Collectively, they send a message: You’re not doing enough, or doing well enough quickly enough.
Such a mindset is ultimately a trap, though. Too many people, in their effort to “get rich quick,” end up doing themselves more harm than good. Rushed decisions lead to costly mistakes.
With this as the backdrop, here are four tips that will help you make more money in the long run, but with less work than you’re doing now.
1. With trading, less is more
You may hear tales of fellow traders scoring big gains in short periods of time. Just know that these success stories, if they’re true, are the exception to the norm. Although the estimates vary a bit from one source to the next, about 90% of traders — so-called pattern day-traders, mostly — lose money from their trading activities.
Why don’t you hear about this majority of people? Brokerage firms certainly don’t want to frighten prospective customers off, but it’s not a particularly beneficial truth for the investment media industry either. Perception is powerful, even if the scary statistic is misleading in itself.
The simple solution is, don’t try to outmaneuver the market. Most of your gains should come from riding the market’s long-term rising tide.
2. Don’t sweat P/E ratios too much
The logic is sound enough. The amount of money you’re putting at risk investing in a company’s stock should be weighed against that company’s current and potential per-share profits. The lower the price-to-earnings comparison (or P/E ratio), the more bang you’re getting for your buck.
The fact is, however, there’s very little correlation between low P/E ratios and a stock’s performance. Low-cost stocks tend to remain low-cost stocks, and relatively expensive stocks generally remain expensive.
That’s not to suggest investors should never think about valuations. But a high valuation isn’t always a dealbreakers.
Fun fact: In his book How to Make Money in Stocks, William J. O’Neil (of Investors Business Daily fame) lays out seven tested and proven criteria for picking winners. Not one of these seven standards considers an earnings-based valuation.
3. Think of your portfolio as a whole
While not without its ups and downs, NVIDIA (NASDAQ:NVDA) has been a big winner of late. Ditto for rival Advanced Micro Devices (NASDAQ:AMD). Even shares of Intel (NASDAQ:INTC) have pushed past the company’s foundry challenges to dish out gains; the stock just hit a record high. Investors would have done well with any of them.
That doesn’t mean an investor should own all of them at the same time, though.
Admittedly, this…
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