Financial advisor’s investing trick to turn $20 into $3 million: ‘First mistake is’

Investing is the key to not being forced to work forever, and when you have a lot of time on your side you can get some pretty insane results with only a small amount of effort – provided you avoid the two most common investing mistakes.

The first mistake is choosing bad investments, because clearly if you choose investments that fail you’re going to run into some problems. Your money won’t grow, or worse, it will go backwards.

But when you get this right, you change the game. In the table below, I’ve shown how investments would grow based only on the long-term share market return of 9.8 per cent.

If you take the biggest financial commitment listed above and invest $20 a day over 40 years, by these calculations you’d make more than $3.3 million in profit.

Your total investment of $292,000 over four decades is less than the $332,000 Sydneysiders need upfront for a deposit to buy a median home.

You can see from these figures that investing just a small amount for a long time will deliver you a substantial investment portfolio.

The second mistake is being forced to sell investments at a bad time.

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Even the best investments will have periods in time where they go down in value.

The current market conditions are a perfect example of this, where stock prices of high-quality companies are going down, based largely on sentiment and investor psychology.

When you have high-quality investments behind you, and they go down in value, you know it’s simply a matter of time before they bounce back.

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But if you’re forced to sell these investments while they’re down, you effectively ‘lock in’ the loss.

The good news is that you can kill both birds with one stone, with the right approach.

Learning how to avoid these mistakes goes a long way to almost guarantee your success as an investor.

Choose good investments: Is active or passive better?

When you invest, there are really only two ways you can do it, actively or passively.

Active investing: Either you or a professional fund manager will pick investments trying to perform better or differently to the sharemarket.

Passive investing:  This is where you simply track the overall sharemarket, and target the average sharemarket return.

Know that there are a lot of different ways to be right when it comes to investing, but some ways are more right than others.

The statistics show that passive index funds perform better than active investments more than 80 per cent of the time according to research from SPIVA.

This suggests if you do anything other than investing in passive index investments, you’re going to be worse off more than 8 out of 10 times.

The odds are stacked against you if you follow an active investing approach.

One of your most important (and valuable) jobs as an investor is avoiding bad investments that fail.

If you make the wrong choice when choosing your investments, you won’t benefit from the sort of returns outlined in the table above.

You can end up struggling through with poor growth, and instead of building momentum, you end up treading water financially.

Note that the example above assumes you only receive the average sharemarket return, which just happens to be the return on an index fund investment.

The promise or upside of active investing is the potential to achieve returns in excess of the market.

You could in theory get a return above the long-term sharemarket return of 9.8 per cent, meaning you’ll make faster progress.

But the question I would ask you to consider is do you need this higher return?

You can see from these figures that the results from just the market are significant, and if you have to risk potentially ending up with nothing, just to make even more progress – you have to question whether it’s really worth it.

Simple way to avoid major investing error: ‘Never be forced to sell’

Now you’re set to choose good investments, you need to avoid the second big investing mistake – being forced to sell your good investments at a bad time.

The good news is that this can be simple to avoid with the right approach.

The only reason you might ever be forced to sell an investment is if you need the money you have invested.

So if you never need the money you’ve invested, you can leave it alone to bubble away and grow for you into the future.

How you make sure you never need the money you’ve invested is simple, but not necessarily easy.

You simply need to ensure you have enough other money available to you to cover all of the spending you want or need to do.

If you have enough money to cover all of your spending, then any money you invest can sit in your investments growing forever and a day.

This all comes back to your plan, and being clear on what money you need today, as well as covering any changes to your spending or income situation into the future.

You can practically do this by setting out a clear budget or spending plan for today, and then thinking ahead about any changes that might be coming up.

When you do this well, you’ll be able to invest with confidence, knowing you have all of your bases covered.

The wrap

Investing can seem complicated, confusing, and even overwhelming.

This is driven (at least in part) by all of the noise online about the ‘best’ way to invest.

It’s also driven by a lack of clarity from most people on what really are the key considerations for someone getting serious about investing.

The gurus can make investing seem more complicated than it actually is, but in reality, if you avoid the two mistakes covered here you’ll be well set up for investing success.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben is about to release his third book, Virgin Millionaire; the step-by-step guide to your first million and beyond.

Ben runs regular money education events to help you save more and invest smarter. You can check out all the details and book your place here. 

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.