Stocks covered in this article
Patience and discipline are easy to understand but difficult to practice. Investing serves as the perfect litmus test. Some would argue that these two characteristics are among the most important factors promoting long-term investment success.
The best way for Americans to become millionaires isn’t through timely real estate purchases or early investments in startups. The scheme is much simpler. Purchases are made on an ongoing basis, usually in the form of automatic contributions to a retirement account from every paycheck.
A recent report from Fidelity shows there are more 401(k) millionaires on the company’s platform than ever before.
Source: Fidelity 2024 Q2 Retirement Analysis. Data as of June 2024.
But there are so many distractions in the world of investing that it’s easy to get tripped up. Rising markets often lead to bad behavior, and some investors don’t care about the distinction between the stock market and a casino.
One timely example is leveraged funds and inverse exchange traded funds, which are rapidly gaining popularity. According to Direxion, which offers these products, there are currently more than 200 leveraged and inverse ETFs on the market, with approximately $100 billion in assets under management.
A recent Bloomberg article featured one of these investment vehicles being designed to give investors triple the daily returns of MicroStrategy MSTR. MicroStrategy MSTR is a single stock often associated with Bitcoin due to the large amount of assets it holds on its balance sheet.
MicroStrategy’s stock price is up more than 100% this year, but the product, which provides 3x leverage on the stock price, is down more than 80%.
Source: Morningstar Direct. The data period is from the beginning of the year until July 2024. Reference to specific securities is not an offer to buy or sell. Past performance does not guarantee future results.
How is that possible? Compound interest also works in reverse.
The answer lies in the structure of leveraged funds. These products are designed for short-term traders, not long-term investors. They aim to achieve daily performance multiples, but over time, the compounding effect of daily resets eats away at their returns. Investors who jump into these funds in search of explosive returns are often disappointed, trapped by the short-term fluctuations they seek to exploit. They seek quick profits rather than leaving things to the market. Unfortunately, the pursuit of a quick buck can backfire spectacularly.
401(k) millionaires, on the other hand, remained disciplined and used their retirement funds to buy stocks every two weeks, regardless of market conditions. Whether the market was volatile or booming, the market was consistent. Over time, their patience and discipline yielded considerable wealth. The same is probably true for many subsequent generations.
The best investments aren’t always the most thrilling, and that’s a good thing.
The author owns no shares in any securities mentioned in this article. Learn about Morningstar’s editorial policy.
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