What you need to keep in mind to have investing success

The right mindset is key to having success in your investing. It doesn’t mean you have to rise and grind, it doesn’t mean you have to ‘win’ or outsmart everybody, and it doesn’t mean getting rich quick or hitting the jackpot. It’s all simpler than that, and at the same time maybe harder to do.

Here’s what goes into the right mindset for investing:

• Time Horizon
• Setting Goals
• Proper expectations
• The basic understanding

Time horizon

I said previously that time and patience are the key to success. That’s because in the short term, any number of bad things can happen in the stock market, while in the longer term, the stock market tends to go higher.

In the 3 Paths to Investing, I mentioned that since the 90s, there have been only a few stretches where the 3-year returns on the S&P 500 index were negative – September 2001- September 2004, September 2008-June 2011, and two days in March 2020. Who knows, we may have a few days like that emerge in 2024 or 2025.

Those stats are why I stress that to invest, you should be thinking of at least 3-5 years as how much time you want to commit. If you’re really looking to make a difference in your life, you will want to extend that horizon to decades. That’s when the magic of compounding, of growth building on itself, plays out.

Something to stress: it’s very hard to become succeed daytrading, or short-term trading. We’re not trading. We’re investing. When we buy stocks, they may not stay in our portfolio forever, but the outlook is years, not months, and when possible, decades, not days. If we root our investing mindset in that outlook, we will give ourselves every chance of success.

Setting goals

The most generic goal in invest is to protect your money – keep it from losing value vs. inflation. If you stuck money under your mattress, but the economy experienced 2% inflation in a year, your money would lose 2% of its buying power. We invest to preserve this buying power, and then to grow that money and buying power over time.

That is an abstract goal, though. More specific goals will help you maintain your motivation and power your investing mindset.

If you set a goal of investing to pay for your child or future child’s college tuition, or to make a down payment on a house in 5 or 10 years, or to afford a fuller lifestyle when you retire, it helps you focus on the longer term and what matters.

Put another way, having real goals and real ‘skin in the game’ will keep you from getting lost in FOMO or the latest trends. It will remind you that the numbers in your portfolio are not just numbers on a screen, they’re a path to your future. It keeps you honest when you remember what you are investing for.

The good thing about these goals is that you are the only one that can set them for yourself. You measure your investing success by your own scoreboard.

My only suggestions are, first, that you set goals that will themselves be investments in your life – where you live, what opportunities you or your family has, how much time you can have for yourself after you are done working – rather than consumption goals like a really big vacation or that sick car you always wanted. And then, more relevantly, set realistic goals in the right time horizon. Don’t expect your money to double in a year, for example. Which gets to our next topic:

Have proper expectations

Investing won’t, on its own, make you rich. Certainly not anytime soon. Say you start with 10,000. If you were to double that money every year, you’d get to a million – let’s say that’s being rich for the purpose of this discussion – in 6 years. Is doubling your money every year realistic? No.

For your investing mindset to stick, you need realistic expectations. To find those, let’s go back to the S&P 500, the index we would most likely invest in. The S&P 500’s best decade was the 1990s, when from the start of 1991 to the end of 1999, it returned 20.66% per year when you include dividends. That is an amazing number. You would double your money in less than four years.

That’s the best stretch since the Great Depression, and it’s tough for individuals to beat the averages. So let’s say 20% is an absolute, absolute best case. And it came at a cost – the 23 years after that point, the S&P 500 returned 6.5%. That was among the worst stretches I could find. The worst stretch in the post Great Depression era was 1972-1981, per officialdata.org. The S&P 500 returned 5.7% a year in that decade, not even beating inflation.

If we zoom out to track the S&P 500 through the past century, average returns are around 10% a year.

I use all that number soup to say a conservative expectation is somewhere around 8%. 10% is attainable, but I feel more comfortable anchoring our expectations a little lower.

At 8%, you can expect your money to double in about 9 years – we’ll go over the rule of 72 at some point, which is a shortcut way to do that math. That’s not so bad. And then when you add the boost of regularly adding to your investments over time from your savings, you can do much better. That’s another concept we’ll talk about later on in this guide.

Investing won’t, on its own, make you rich. But it does afford you the chance to grow your money over time, which is better than the alternatives, and it doesn’t need to take too much of your time and effort to do so. Why does all this work?

Understanding the basics of investing

You don’t need to go into the history of stock markets and capitalism to have the right mindset for investing. Don’t worry about Adam Smith or the Amsterdam stock exchange or the tulip bubble – you can invest without remembering them.

But it’s worth at least having a basic big picture grasp of how stock markets work, and having a basic comfort level in their mechanics.

I want you to understand that the market isn’t totally random, it isn’t totally gambling, and it does track to things happening in the real world. Not always on a day to day basis. But zoom out, and what’s happening here matches what happens in the real world, and has a logic to it.

Let’s use two cliches to explain this.

Putting your money to work for you

First, putting your money to work for you. How does that sound to you? How does that make you feel? Does it even make sense?

The point of investing is to allocate capital into businesses that can grow. Those businesses will solve problems for customers who are willing to pay to have those problems solved.

Here’s a simplified example: if I really want a microphone to record my voice for a video, and there are enough people like me, a company might try to make microphones to sell to me. To raise the money to design and build those microphones, including hiring the people involved, renting office space, marketing the microphones, and so on, they may have to go to a market. You as an investor may choose to invest in a company with exciting prospects in the microphone space, and that’s how this all comes together.

If you invest in companies that offer a valuable product or service to customers, such that those companies grow their revenue and profits over time, and you pay a good price for the shares of those companies, you will probably do ok over time. Again, still super simplified, but that’s the idea.

The stock market is not the economy

The second cliché is that the stock market is not the economy. You’ve heard that one?

It’s true: the stock market is just a small part of the economy. Specifically, the stock market reflects corporate profits. So when you invest in an index, you get the right to a small piece of their profits. There is more to the economy than corporate profits – we could argue that raising corporate tax rates is good for the economy, even as it hurts those profits, for example. Or we could argue that cutting corporate tax rates is good or bad for the economy, as it might help those profits but have other side effects.

But the reason your money grows is that when you invest in the index, your right to a small piece of those 500 companies’ profits grows in value as their profits grow over time – and the profits of U.S. companies usually do, as the U.S. economy grows. That’s the 10% per year historic growth I mentioned earlier.

When we invest, we are usually not literally investing in companies, i.e. giving Apple or Google money directly for them to use. We invest in the secondary market, buying shares from other investors. But don’t worry about that part of things for now, we can explain it later.

How does that make you feel? Some might feel confused or queasy about this. Late-stage capitalism, fat cats, the 1%, and so on. I hear you. I’m not going to get super political in this guide. We’ll talk about investing in a way that reflects your values later, but it’s still investing.

By virtue of having built my career in or connected finance, I’ve participated in capitalism. And my view is that it’s the best of all available systems, when well regulated. But you, might disagree with me. Which I can understand and empathize with.

What I’d say is that the economic system isn’t going to dramatically change overnight, just as a matter of inertia. And if it does, it’s unclear whether our money is going to be worth much anyway. So, you may as well participate in this system as a way to benefit from it and achieve your goals. Which is where investing comes into play.

So, that’s the investing mindset I’m asking you to bring to the table. Does that work for you? Great.

Next up: how to actually start indexing, the first and simplest path on our investing journey.