Five years have passed since I started investing in individual shares towards my retirement. I had bought stocks before this, but this was when it really got serious: I was investing serious amounts towards a serious goal. Here are eight things that I wish I had known before starting.

Before we start, an important point: these aren’t necessarily things to avoid – avoiding some of these things is impossible! They are just things to be aware of before you start. Also know that these lessons come from my own (often painful) experience, rather than me preaching them from up high.

1.Having a plan saves pain and money later.

Unless you have a clear idea of why you are investing in the first place, it is almost impossible to form a deliberate strategy. And if you don’t have a deliberate strategy, it is easy to interact with the stock market in an emotional or chaotic manner rather than a measured one.

A few years in, investing without a clear plan can also lead you to a weird collection of holdings that sounded good at the time but aren’t grounded in solid and lasting reasons for owning them long-term. This can lead to an expensive reshuffle being required later.

I will point you towards a guide to forming an investing plan later. But first, let’s look at the number one behaviour you must set yourself up to avoid.

2.Overtrading equals death.

There is almost nothing – apart, perhaps, from something I’ll talk about later – with the potential to harm your returns more than overtrading. I have written about this a lot, most notably in my confession about a disgraceful 2021. I feel passionately about helping you avoid similar behaviour.

Unless your broker doesn’t charge a fee or FX for every trade, each one burns a small part of your portfolio forever. And even if there aren’t fees, repeatedly funding the latest hot idea by selling a previously hot idea can mean that you aren’t invested in anything long enough to profit.

In a sense, you are constantly going back to step one. In fact, you will usually start from a step behind because of the fees and taxes attached. The solution is simple: set a higher bar for any buy or sell decision in your portfolio. And give any investment that does pass that bar enough time to flourish.

3.Building a portfolio takes time.

If you have chosen to invest in individual shares, you need to accept that it will take time to assemble a diversified portfolio. You are unlikely to buy fifteen shares in one go. Even if you had enough money to do that, it would require you to sacrifice on the quality of opportunity you are taking up.

It is more likely that you will build a portfolio over several years as you contribute more money to your account and wait for investments that are 1) a good fit for your strategy and 2) become available at a compelling enough price.

The result is that your portfolio will be very undiversified at first. You may even see your balance swing by several percent each day as your one or two holdings wiggle about in value. It is crucial during this initial period to stay focused on the long-term goal and seeing out your plan.

You definitely shouldn’t compare the return of your handful of stocks to the market over such a short period and get discouraged or overly elated about it. The divergence in returns will likely be down to randomness more than anything else.

During this time, it can be especially tempting to trim shares that have performed well for you. You might look at your portfolio and think ‘jeez, this is now 70% of the whole thing!’. But when you think about the future contributions you are going to make, is it really 70% of the whole thing?

It was this error that led me to trim a holding in 2021 and lose out on future gains equal to 25% of my entire portfolio’s value at the end of 2024. Ouch. Before selling any holding, you need to carefully consider whether it is worth interrupting the compounding. The reasons often don’t stack up.

4.You are highly unlikely to ‘beat the market’ every year.

Different approaches to investing and different types of shares are going to outperform at different times. As long as you accept this and don’t expect to rack up above-market returns every year, this isn’t a bad thing. Even Warren Buffett, the GOAT, said he expected to underperform during bull markets.

The dangerous thing is flip-flopping and always trying to catch the next wave, a ‘strategy’ that lists overtrading and a lack of confident, deliberate decisions among several nefarious side effects on your likelihood of success as an investor.

And what does success mean, anyway? Beating the S&P 500 return, or achieving the life that you want through investing? For that reason, I would consider benchmarking against the return you require to meet your goals (and doing so over longer periods) instead of a market benchmark.

A healthy indifference to short-term market returns could also leave you better placed to achieve better long-term results, as we’ll see now.

5.Understand the edge you are trying to exploit.

An investment edge is ‘something’ that improves your ability to get the results you need from your investment. It is often framed as justification for picking your own shares in the first place, as opposed to focusing purely on asset allocation and targeting a ‘market return’ through index tracking ETFs.

At Morningstar we talk about four different sources of edge: informational edge (access to better information), analytical edge (better use of the same information), behavioural edge (making fewer errors) and structural edge.

Structural edge is where you attempt to turn the professional money management industry’s shortfalls to your advantage. These shortfalls mostly revolve around the same issue: a need for most funds to perform favorably against the market and their peers over stupidly short time periods.

As I wrote about in this recent article, I happen to think this is the most promising edge for an individual investor to pursue. You can build the edge you are trying to exploit into the investing criteria you set for stock holdings or simply use it as inspiration for how you source potential ideas.

6.Expectations matter.

The surest way to lose money in stocks over the medium-term is to invest in a company at a price that reflects wildly optimistic expectations about the future. Any change in that narrative can lead to a big, fast and merciless reassessment of value by the market.

Instead, I prefer to buy when expectations for a high-quality business or asset are low. In essence, I am targeting long-term value and competitive strength over near-term popularity.

The long-term bit, as we covered before, could provide an edge versus professional investors. After all, many are focused on shorter term performance and not missing out on whatever is hot. If going against this was comfortable, it would not have the same potential for outperformance over longer periods.

Resisting the FOMO on things that everybody else is making lots of money in right now is a vital part of this. In the wild days of late 2021, I was weak and ended up buying into shares I would never usually touch with a barge pole. I will be stronger next time, and so can you.

7.Just because you bought it cheap, doesn’t mean it can’t get cheaper.

I thought I was making the contrarian bet of a lifetime in October 2022 when I saw premium New York City office assets selling for less than 50 cents on the dollar. I thought that work from home fears were overblown for high quality assets, especially in a global hub like New York.

It turns out I was right – the shares I chose to buy now trade more than two times higher than when I first bought them. But even though the shares were clearly very cheap when I bought them, that didn’t stop them from getting cheaper. Much cheaper.

By March 2023, my initial position was 50% underwater because sentiment to office and real estate in general just kept getting worse, and worse, and worse. This just goes to show that you can be right in the longer term and still lose a lot of money (on paper) in the short term.

If you aren’t comfortable with that happening, then you should really consider whether you are cut out for owning individual shares at all. Speaking of which…

8.You don’t have to do it.

Investing in individual shares is not the only way to improve your financial future. There are excellent ‘hands off’ ways to become a part owner in businesses through the stock market without the risks and potential pitfalls of picking shares yourself.

Either way, it is vital to approach your investing goals in a way that is deliberate as possible. To help you get there, I recommend going through the five-step process outlined by my colleague at Morningstar, Mark LaMonica. You can find Mark’s guide to defining an investing strategy here.

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