An Easy Way to Double Your Stock Market Returns

Today, I’m going to share with you something that’s helped some of the world’s richest people build and preserve wealth.

In fact, it is one of the most important insights into how to be a successful investor that I’ve ever come across.

As I’ll show you, it could double your returns…

This simple insight separates the dumb money from the serious money. And stock market winners from stock market losers.

In short, it allows you to dramatically reduce your risk of losses while greatly increasing your potential gains.

As IL’s Financial Editor, it’s my job is to help you grow your savings so that you can live the lifestyle you’ve always dreamed of.

There’s simply no point in fantasizing about living or retiring overseas unless you have the money to do so.

Fair warning: What I’m about to share with you goes against just about everything Wall Street stands for. And it probably goes against everything you’ve learned as an investor.

But in my career as an analyst and as an investment writer I’ve never shied away from controversy. And I’m not about to start now.

So what am I talking about?

It’s simply this: When we pursue short-term investing goals we do so at the expense of long-term profits.

Put another way, having a long-term investing time horizon is the single most important step you can take to improve your chances of success in the markets.

But don’t just take my word for it…

Mutual fund legend Jack Bogle has what is possibly the most startling statistic in the investment industry.

According to data Bogle compiled, from 1983 to 2003 index funds tracking the S&P 500 returned 12.8% a year. But the average mutual fund gained just 10% a year. And the average investor gained just 6.3% a year.

Seems impossible, right? By investing in the S&P 500 with a simple ETF and holding for the long term you could have doubled the returns earned by the average investor and significantly outperformed the average mutual fund manager.

What these figures show is that individual investors are incapable of staying invested over the long term and focusing on the long-term trends. Instead, your average individual investor spent huge amounts of time and effort chasing the latest “hot thing.”

A good example of this comes by way of Michael Mauboussin of Legg Mason. According to Mauboussin:

At the height of the technology and telecom bubble in the first quarter of 2000, investors poured a record $140 billion into growth funds while pulling $40 billion out of value funds. In the subsequent five years, value funds substantially outperformed growth funds.

The truth is we’re hard wired to make this kind of mistake and miss out on long-term gains. To be successful as an investor you need to learn how to identify long-term trends and have the ability to ride them out.

The more you buy and sell…the more you trade in and out…the less likely you are to profit from the big trends.

You see, we all suffer from psychological biases that make us crummy investors. One of these is “recency bias.” This means we tend to look at recent outcomes and project them into the future without considering the long-term trends.

So in the example above, investors looked at the recent rises in growth stocks and placed big bets on growth funds. What they failed to take into account was that, over the long term, value stocks and value funds have a much better record of success.

Overriding these emotional “ticks” is essential if you want to make money in the markets over the long haul. And the single best way to avoid making mistakes is to take the long-term view.

Short-term decision-making almost always acts to the detriment of long-term results. A good example of this is the recent shakeout in the emerging markets.

Although the long-term picture for emerging market growth is still favorable, investors have decided to sell their positions because of short-term considerations (higher than expected inflation, rising food prices, etc).

They’re trying to time the market, instead of playing the trend. Which means they’ll most likely miss out on the big gains.

So the next time you decide to commit money to the markets, first ask yourself: How long am I prepared to stick with this investment?

Unless you have an answer…and are willing to stick to that that answer not matter what your emotions tell you along the way…simply hold off.

As Jack Bogle’s study shows, by setting your sights on the long-term picture you could easily end up doubling your investing returns.