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The truth is that most successful do-it-yourself investors don’t have any special knowledge or ability to pick stocks that will soar in value – at least not in the short run, John Heinzl writes. (Alex Slobodkin/iStockphoto)
The truth is that most successful do-it-yourself investors don’t have any special knowledge or ability to pick stocks that will soar in value – at least not in the short run, John Heinzl writes. (Alex Slobodkin/iStockphoto)

Investor Clinic

The real keys to investing success Add to ...

As The Globe’s Yield Hog and Investor Clinic columnist, I receive a lot of e-mail from readers.

That’s great, because I often use reader questions to generate column ideas. If two or three readers are asking me about something, chances are there are dozens more wondering about the same thing.

So please keep your questions coming in 2014. I can’t answer all of them, but I read every one.

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Interacting with readers over the past year has also given me valuable insight into what investors are thinking.

I’ve heard from countless do-it-yourself investors – some of whom have been at this a lot longer than I have – who have built considerable wealth and achieved financial freedom by taking control of their own portfolios.

These people are proof that it can be done.

I’ve also heard from plenty of newbies who are feeling their way through what, at first, can seem like an impossibly complex maze of investment choices.

What I’ve come to understand, based on my interactions with readers on both ends of the spectrum, is that people start out believing that investing is terribly difficult but eventually realize that it’s actually quite simple.

The truth is that most successful do-it-yourself investors don’t have any special knowledge or ability to pick stocks that will soar in value – at least not in the short run. Nor are they skilled at predicting when the market is about to rally – or fall off a cliff. They don’t have a crystal ball, insider information or a fancy trading algorithm that flashes “buy” and “sell” signals.

But they do have one big advantage: They understand the value of time and compounding.

Investors who write to me with personal success stories are, almost invariably, buy-and-hold investors. Some have owned their stocks for decades. They are the first to admit that trading skill had nothing to do with their results.

Rather, they bought boring, conservative companies with rising dividends (banks, pipelines, utilities, telecoms and consumer stocks, for example), reinvested those dividends to maximize compounding and let time take care of the rest.

It’s when investors try to cheat time that they get into trouble.

“When I started investing in the stock market over 20 years ago, I tried to get rich quick by buying and selling small-cap stocks. It worked for a while, but most often things ended badly,” one reader told me.

“At 65 years of age I follow a much more conservative strategy now and am happy to receive my quarterly dividends from companies like TD Bank, Royal Bank, Scotiabank, TransCanada, BCE, Rogers, Power Financial, Thomson Reuters and Suncor.”

Once you understand that there are no investing shortcuts – that time and compounding must be allowed to work – you will be less likely to let your greedy, impatient side take over. The urge to speed up the process, or to seek out gains that aren’t realistic, is what often leads investors astray.

In their haste to make money now, impatient investors are more likely to buy products they don’t understand (hedge funds and leveraged ETFs, for example) and to be seduced by complex securities that claim to minimize risk while siphoning off fat fees (principal-protected notes).

Investors who understand the importance of time and compounding, on the other hand, are deeply skeptical of anything that appears to offer a free lunch.

And they steer clear of anything that can’t be explained to a 10-year-old.

They know that building wealth is a long-term process, and that along the way there will be setbacks.

They don’t try to eliminate volatility; they learn to live with it.

These principles apply not just to dividend growth stocks, but to exchange-traded funds and low-cost mutual funds. I have all three in my own portfolio, and they have one thing in common: I rarely touch them.

I can’t make my money grow: Only time can.

Follow on Twitter: @johnheinzl

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