Beating the Odds in Investing: 4 Things Top Earners Do Differently
The most successful investors don’t speculate or gamble. They invest based on knowledge, experience and data — and end up with high long-term returns as a result.
So how can you earn similar “asymmetric returns,” minimizing risk while maximizing returns? Several wealthy investors weighed in to share how they approach picking investments and how you can follow in their footsteps.
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1. Understand What You’re Investing In
If you don’t understand the investment or why you’re making it, you’re effectively gambling. The wealthy make it a habit to understand where they are putting their money.
“You should understand what you are investing in, meaning stocks, bonds, ETFs, mutual funds and so on,” explained Dr. Jay Zigmont, PhD and certified financial planner (CFP) who founded Childfree Wealth. “When you buy a stock, you are buying a very small part of each company. With bonds, you are effectively making a loan to a company or the federal government and getting back interest. Mutual funds and ETFs are bundles of stocks, bonds or both.”
“Each investment you make comes with risks and rewards,” he continued. “There is a balance between taking on risk and the potential return. Often riskier investments may have a higher potential return, but not always. You need to make sure your potential investment returns meet your goals. If you have aggressive goals, you may need to take more risk to get there.”
“For our clients, we tend to follow a long-term, passive investment strategy that uses three ETFs as the core investments,” Zigmont said. “The three ETFs include investing in U.S. stocks, international stocks and bonds. This simple, passive investing strategy works for most.”
2. Balance Fundamentals With Momentum
As a general rule, long-term investors don’t get caught in the weeds of short- or medium-term momentum. However, some more advanced investors include momentum alongside long-term fundamentals to find the best investments.
“The investment approach I use is akin to a three-legged stool,” said Anthony Termini, investment advisor and contributor at Annuity.org. “It’s sturdy and durable only when all three legs are in place. The legs are solid fundamentals, earnings momentum and timing momentum.
“Solid fundamentals include a strong balance sheet, generous profit margins and plenty of free cash flow,” said Anthony Termini, investment advisor and contributor at Annuity.org. “Lots of companies check these boxes, but still fail to create the earnings momentum that can move their stock prices higher.”
“The long-term trajectory of stock price is directly correlated to earnings momentum,” continued Termini. “A company that creates new products or services stands a very good chance of accelerating sales and earnings growth […] I look for companies that continually have some new offerings in the early stages of the product life cycle. However, before I buy a stock with solid earnings momentum, I want to make sure that it also has solid timing momentum. I want to make sure the stock is not in a downtrend.”
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“Timing momentum means that the short-term uptrend is validated by a number of moving averages that confirm its durability,” he concluded. “A resource I use to put all of these pieces together is EPSMomentum.com.”
3. Consider Alternatives — With Caution
Most investors stick with stocks and bonds, perhaps sprinkled with the occasional REIT. However, many wealthy investors look for asymmetric returns among alternative investments such as private equity real estate or energy.
“We often advise our clients looking to build generational wealth to explore alternative investments, such as oil and gas minerals or direct drilling opportunities,” said Jace Graham, CEO of Rising Phoenix Capital.
“For example, our oil and gas mineral funds have generated strong returns with an average annual rate of return of 16% over the last six years,” Graham continued. “These investments offer a source of passive monthly income through royalty payments, which are not tied to operational costs or risks typical of other investments. This aspect of oil and gas investments can add a layer of stability and predictable income to your portfolio, for risk management and income generation — especially useful in today’s volatile economic climate.”
Use caution, however, when you veer off the well-trodden path. Remember the first point: You should understand an investment before parking any money in it.
4. Get Expert Help
When in doubt, seek out an expert to offer personalized advice.
“Building wealth is a marathon not a sprint, and it requires a plan,” said Dr. Robert Johnson, chartered financial analyst (CFA) and professor of finance at Creighton University. “People should work with a credentialed financial advisor who is a fiduciary, preferably a CFA charterholder or CFP certificant.
“When we get sick, we go to the doctor. When we get into legal trouble, we hire a lawyer. Yet, somehow people believe they should be able to navigate the increasingly perilous financial waters without professional help,” Johnson cautioned. “It starts with determining goals and objectives, as you cannot arrive at a destination without first identifying it.”
Start with your end goals in mind, and invest accordingly.
When you’re young, you can afford to take greater risks while pursuing higher returns. The closer you get to retirement, conventional wisdom urges you to scale back the risk in favor of protecting what you’ve built.
If you don’t feel ready to hire a human financial advisor, consider starting with a free robo-advisor to help you get started with investing. It takes skill and knowledge to consistently beat the market by picking individual investments, so proceed with caution — and a lot of education.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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