Why Investing Success Isn’t Really About Picking Stocks

If you turn on CNBC or any other financial news media, you might think investing success is all about picking the right stocks at the right time. After all, it seems every pundit and talking head on the air is touting their favourite investment idea, and laying out convincing reasons for why you should also jump aboard.

And while having professional investors come on live TV and talk about the most exciting investments in their portfolio makes for good entertainment, it’s not exactly constructive for your net worth.

Because the truth is, even though picking stocks gets all the attention, it’s only a tiny part of the investing puzzle. And in the grand scheme, there are some other ingredients in this financial recipe that are much more important than finding the perfect stock to buy. So I’m excited to show you what those are.

So What Really Matters for Investing Success?

If stock picking isn’t what’s important to your portfolio’s performance, then what should you focus on to ensure your net worth is always accelerating? Well, it’s a good question. And from my own investing experience, I think there are three key activities that will have a much more drastic impact than finding the right company to bet on.

#1 – Consistent Savings Stack Up

This might sound obvious, and it’s definitely not glamorous. But the more money you save, the more you can invest! Plus, for most people (especially newer investors), just getting in the habit of socking away 10-20% of each paycheck will do much more for your financial well-being than any kind of secret stock picking method.

For example, imagine you have $1,000 to invest right now, and you’re saving an extra $100 per month. Now let’s say you pick the perfect stock and it doubles in price. Assuming you put all your eggs in that basket, you’re up until $1,000. Well done!

But while this is nothing to be mad about, it still only represents less than a year of your savings. And there’s certainly no guarantee you’ll be able to replicate this success with your next stock pick. On the other hand, it should be pretty simple to consistently pay yourself first every time your employer makes a direct deposit, right?

#2 – Low Fees Are Key

Another facet of investing that doesn’t get enough coverage is the high cost of fees. Just as small savings over time add up to have a big impact, so to can the expenses you pay for the pleasure of holding your investment. When these fees compound for years on end they can have double-digit percentages off your returns.

And it doesn’t matter whether you’re a self-directed investor managing your own brokerage account; or, simply accumulating mutual funds under the guidance of a financial advisor. In both cases, you need to be very careful about overpaying.

For the self-directed trader, commissions can quickly add up. So having clear guidelines of when to buy and sell is of paramount importance, lest your emotions get in the way and you find yourself jumping in and out of stocks.

In addition to the commission fees, you’re also likely to have less time in the market which could keep you out of potential upside. At the very least, you may want to check out a discount broker, or the zero-commission mobile trading app, Robinhood.

Unfortunately, those working with an advisor may be even worse off. Many popular mutual funds have embedded (or hidden!) commission fees. And these can end up costing you 1% or more each year. While this might not sound like a lot, the fees can seriously add up over time. Luckily, there are newer low-cost options like Betterment, which help you build a diversified long-term portfolio at a fraction of the typical cost.

#3 – Make A Plan You Can Stick With

While regular savings and a low-fee approach are a great way to get started building your wealth on the right foot, there’s still one big consideration. Because at the end of the day, if you can’t stick with your investment plan, then you’re likely to bail out at the worst possible time.

And this isn’t speculation either. Mutual fund flow data confirms that buy and hold investors are likely to sell at the worst possible time. This kind of knee-jerk panic reaction can add years (if not decades!) to your retirement timeline. So while it’s impossible what will happen in the stock market tomorrow, we can improve our chances of success with some disciplined upfront planning.

Consider looking at sample investment profile questionnaires online, or meeting a fee-only financial planner to help you understand how your mix of assets should be adjusted based on your risk tolerance and investment timeline. If you are going to pick stocks, determine your trading signals, criteria and plan ahead of time.

Some sober and rational planning ahead of time can really help you stay out of your own way the next time the market takes a plunge.

Conclusion: Focus on What You Can Control!

At the end of the day, picking great stocks consistently isn’t easy. But the good news for you is, that doesn’t really matter! Because as we’ve seen above, there are other levers you can pull to really drive your investing success for the long term.

So even though I personally spend a lot of my time researching stocks to buy, I mostly do it because it’s something I enjoy. And I know that no method of stock picking really matters unless you have these foundational financial habits in place!