One of the biggest mistakes new investors make is called “chasing past performance”. At first glance, it seems like a good strategy. Look at a bunch of investment options, sort by which ones are doing the best, then buy those! But there’s a big problem with that. “Which ones are doing the best” is only looking at PAST performance. What you care about with investing is FUTURE performance.
Worse yet, when you buy what has done the best in the recent past, it presents a couple other problems. First, you’re likely “buying high”. You MISSED that great run up in price, now you’re PAYING for it at the now extremely high share price. Second, by buying the stocks or funds that did the BEST, you’re likely introducing a lot of risk and volatility to your portfolio. The same investments that can shoot up in value, can also shoot down in value. We all would love our investments to go up quickly, but if they go down quickly then it’s all for nothing!
So which stocks are going to do the best looking FORWARD? I have no idea. And if I did know, I certainly wouldn’t be posting it to Instagram. I’d be making billions trading on that knowledge of the future from my private island in the south Pacific.
So what do you do? Well, it turns out it’s impossible to know which stocks to buy ahead of time. But it’s actually very easy to GUARANTEE yourself your fair share of the total market growth. How? Buy all the stocks! The easy way to do that is by buying an index fund. Keep buying more whenever you’ve got the money. Never sell until you retire, then just sell a little at a time. That strategy will outperform 95% of investors.
As always, reminding you to build wealth by following the two PFC rules: 1.) Don’t invade sovereign democratic nations and 2.) Don’t succumb to hateful propaganda.