I think we can all agree that it’s better to be rich than poor, and financially independent than worry about making ends meet. As Woody Allen once said, “money is better than poverty, if only for financial reasons.”

But while we all strive to achieve financial independence, which for most of us means a comfortable retirement, what trips up so many investors is not having the right investing strategy.

And while there are several proven investing approaches you can use, requiring several fundamental principles to master, one key principle stands above all the rest as the most crucial path to ultimate investing success.

Over 23 years I’ve learned this principle the hard way, and want to share it with you to hopefully help you achieve your own financial dreams and hopefully avoid repeating my costly mistakes.

Rome Wasn’t Built in a Day

My father turned me onto investing in the stock market at the age of nine, back during the tech boom. Back then we both got suckered into the greatest bubble in US history when it seemed like anyone buying any tech stock could double their money every year. In fact, that was my starting expectation, 100% annualized returns, which several stocks had managed to achieve over the past decade at the time (a 1000 fold increase in a decade).

I remember asking my mother, with a straight face, “where will I invest my trillions?!”. Well needless to say after the tech crash wiped out half my net worth (I’ve always been a dedicated saver and started out with $10,000), I realized that you can’t actually mint money on Wall Street with such speed or regularity (S&P 500’s historical return is 9.1% CAGR).

Sadly I didn’t have a great mentor to steer me into the right approach and so I spent the next decade or so floundering about looking for get rich quick schemes that could give me a short cut to something approaching 90s style tech returns. I tried everything including the following:

Day trading (with dozens of different technical analysis systems)

I managed to make, and then eventually lose, several fortunes (including $132,000 in a single day at one point with option speculation that blew up in my face). What I learned the hard way (the school of hard knocks has the most expensive tuition in the world) is there are no short cuts to financial independence.

Yes, you can get lucky at times, but remember that it’s not what you make in the short-term, but what you keep in the long-term that counts. Short-term speculation (as opposed to long-term investing) is literally like gambling. Imagine you are playing blackjack and you let it ride every single time.

If you get on a winning streak, you’ll double your money every time. Within five hands you might have increased your initial bet 32 fold and within seven hands, might be looking at a 128X increase in your original wager.

But eventually luck will turn against you and you’ll end up with nothing. Not just will you have wasted some time, but you’ll have to face the regret of what you could have done had you not been so greedy and walked away just one hand earlier.

The same is true of investing. The media loves to fixate on the big winners at any given time, which over the past decade was mostly hot growth stocks (the Nasdaq is up 500% since March 2009 and big tech is now 23% of the entire S&P 500).

But chasing performance and counting on great momentum continuing to work for years, is ultimately what gets so many investors in trouble and results in terrible long-term returns.

20-year annualized returns by asset class

Over the past 20 years, the average investor has managed to just barely keep ahead of inflation, thanks to two main reasons. The first is jumping from strategy to strategy, chasing recent performance. The second is ignoring valuations.

Recency bias is the psychological principle that what has happened in the recent past will continue to happen, and it’s what explains how stocks can swing from wildly overvalued to wildly undervalued.

s&p 500 index inflection points

For example, during the peak of the tech bubble mania, the S&P 500’s forward PE hit a mind-boggling 27.2, compared to its 25 year average of 16.2. During the Financial Crisis, it managed to fall as low as 10.3, which set up the massive 300+% 10-year rally we’ve seen over the past decade.

Never forget that mean reversion ALWAYS happens eventually. In other words, stock prices can’t grow to the sky (or sink to zero) because companies are always a function of fundamentals, such as forward earnings.

s&p 500 valuation measures

Today, the S&P 500 is at its historical average valuation which means that stocks are likely to grow in line with earnings, which is why it’s so important to have realistic expectations about future market returns (if you’re an index investor).

But what if you aren’t just investing in the overall market via a low-cost S&P 500 index fund? If you follow the popular strategy of factor investing, (different strategies to achieve different goals) then you also need to remember that no strategy works all the time.

factor performance asset chart

Various strategies go in and out of favor over time, and it’s rare for a single approach to remain #1 for two years in a row. That’s why it’s important to take a big-picture view when determining what long-term investing strategy is right for you.

annualized returns chart 2019

As you can see, there are plenty of strategies that have beaten the market over decades. But, all of them go through periods of underperformance. But it’s precisely for this reason that things like low volatility, dividend growth investing, value and small caps manage to maintain their alpha over time.

The key to good investing is to buy low and sell high right? Well, you can’t buy low unless some otherwise great strategy has been weak for some time, which now sets up for success in the future.

Just as good investing is about a contrarian mindset with individual companies (or the entire market if you’re a passive investor), so too must you build an overall long-term portfolio approach that fits your needs.

For example, my personal investing approach combines proven alpha factors like value, quality (because these companies tend to have lower volatility over time), and dividend growth. I chose this approach for my new Deep Value Dividend Growth Portfolio (the strategy I’ll be using for all my future savings) because it fits my individual needs and psychology beautifully.

4% yield (double the market’s)
11.8% average 5-year dividend growth rate
10.8% expected dividend growth over the next five years

Even if the S&P 500 suffers through a lost decade in the coming years as many analysts expect, this portfolio will generate about 7% total annualized returns from dividends alone.

But if your time frame is shorter and you have need of even safer income (like during retirement)? Well, then my new Bunker Dividend Growth Portfolio is perfect for you. That portfolio is 100% dividend aristocrats and kings, yields 3% (50% more than the market) and has been growing its income stream at double-digits for the past five years and is expected to continue doing so in the future.

Basically, my focus and specialty is in finding quality companies that will pay you safe and rising dividends, even in a recession, so you can patiently wait out any future market storms, confident that your financial situation is getting better with time.

But this brings me to that critical and overlooked factor that is the Achilles heel of so many investors, and the reason so few people achieve the kind of returns they want and need.

Patience Is The Foundation Of All Investing Success So Here’s How To Master That

I am relatively young (32) and ambitious, with grand long-term plans that stretch out for decades and even centuries (should Alphabet’s anti-aging subsidiaries achieve their goals of curing aging and death). But what my five years in hell have taught me (my failed marriage in Alabama was mostly spent living in abject poverty) is that the trick to patience and discipline is certainty.

Specifically, the certainty that the path I am on is sustainable and, given enough time, I am assured to reach my goals. What drove me nuts in Alabama was starting to save and invest for the future, but then my ex-wife springing some unexpected financial need on me that would wipe out my portfolio every single time.

Today I have my personal finances on lockdown, including no debt, a high savings rate, a massive emergency fund, and now a long-term investing strategy that is built on the shoulder of financial giants (the greatest investors in history and decades of data showing it works).

Best of all, I’m getting paid over 1% per quarter no matter what the market does, and that cash income is growing at double-digits. In other words, I’ve already won because I’ve rigged the game so far in my favor that given enough time I will 100% be able to live off a fraction of my passive income alone, using the Buffett Rule I outlined a few weeks ago.

In other words, thanks to living with financial uncertainty and frustration for so long (and learning to be happy on a shoestring budget), I’m able to be as patient as a monk because I know that my financial future is guaranteed because I’m on the right financial path to achieve my goals.

Sure there will be roadblocks along the way (like company investment thesi breaking) but the core of my investing approach is now rock solid, with a foundation that can withstand anything the market, or life, can throw at me.

So no matter how long it takes, or how much the market may gyrate or disagree with my investments in the short or medium term, I’ve achieved the infinite Buffett like patience necessary to maintain a disciplined approach to a time tested strategy that not just will work over time, but will pay me exponentially growing income along the way.

That income means that, even without having to sell a single share, my financial resiliency will only getter better with every passing day.

Basically, my point is that if you can learn to be happy on the right path, one that is nearly certain to achieve your goals in time, then being patient and disciplined is a lot easier. By making time your greatest ally, instead of your enemy (as it is for those drowning in debt), then patience comes naturally and easily.

And ultimately the ability to be patient and disciplined so you can stick to a good fundamental strategy is what separates great investors from all the rest. As Buffett famously said, “we don’t have to be smarter than the rest, just more disciplined.”

Bottom Line: There Are No Short Cuts to Achieving Your Financial Goals

While there are many roads you can take to investing success (including non-dividend paths) without the right mindset all the strategies you try will fail. Just as Rome wasn’t built in a day, you can’t achieve financial independence overnight, via dangerous speculation.

You might get lucky for a while, but just as with the blackjack player that lets it ride on every hand during a winning streak, you’ll end up losing your fortune when fickle lady luck inevitable turns against you.

That’s why it’s so important to have a solid long-term investment strategy that has proven over decades to be a great way to grow wealth over time AND allow you to keep it in the end.

Personally, I’m a big fan of value dividend growth investing, not just because it combines various proven alpha factors, but also because a portfolio of quality dividend growers, bought at good to great prices, is virtually assured to generate great returns on exponentially growing dividend alone.

But no matter what approach you decide is right for your personal goals, temperament, and risk profile, never forget that patience is the most crucial investing tool of all. No strategy will work all of the time, and if you bounce around from approach to approach, then studies, experience, and common sense tells us you’ll achieve mediocre returns at best, or possibly even lose money even over decades.

And ultimately time is the most valuable commodity we have because not even the richest person in history has been able to buy a second more of it. After wasting over a decade chasing the holy grail of investing, a sure-fire, can’t miss, get rich quick strategy, I’m here to tell you such a thing doesn’t exist.

Only by accepting the truth of how one truly becomes wealthy (disciplined savings, and sound long-term investing at good to great valuations), can you truly set yourself up to achieve your long-term goals.

Yes, the road is long, windy, and has plenty of pitfalls (bear markets are inevitable). But over my 23 years of investing experience and five as a professional investing analyst/writer, I’ve learned that the true trick to maximizing your financial prosperity (and overall happiness) is to revel in the journey, rather than obsess over the destination.

When you know your strategy is sound, and your overall financial health is excellent, then you can take comfort in knowing that you’re at least on the right road, and getting rich is only a matter of time.

You may never be able to own a yacht, penthouse or Bentley using such an approach. But at least you’ll never be wasting your time, as I and most investors have done for far too long chasing something that doesn’t exist; a short-cut to our financial dreams.

About the Author: Adam Galas

Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...