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When I learned who the best investors were, according to Fidelity, I was shocked. My guess is that you’ll feel the same way. Would it shock you to find out that if you want to be an above average investor, it pays to play dead?

That was the conclusion of a study by US fund manager Fidelity, according to a 2014 article on Business Insider. Fidelity had analyzed thousands of client accounts and broke them down into percentiles, trying to figure out what the top performers had in common. The result: the best investors were either dead or had forgotten they had an account.

But how could that be true? The real reason is because the investors weren’t focused on buying and selling based on the news. Unfortunately the news plays a major role in determining how we feel a specific investment is doing.

People see that the economy is doing poorly or they hear that people should be worried about their 401(k) and then all of sudden they’re thinking about moving their investments into “safer” alternatives – meanwhile losing out on the potential upside of their investment. Fidelity has identified these emotional drivers and has identified that these 6 attributes to be investors biggest downfalls.

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Follow these 5 simple steps to build long-lasting wealth…

Compound Growth: Long-term investing allows for the power of compounding to work in your favor, helping your investments grow exponentially over time.
Reduced Transaction Costs: Active trading often incurs higher transaction costs, while long-term investors can benefit from lower fees and taxes.
Emotional Stability: Long-term investors tend to experience less stress and emotional ups and downs compared to active traders, leading to better decision-making.
Diversification: Long-term investors have the opportunity to diversify their portfolios more effectively, spreading risk and potentially enhancing returns.
Tax Efficiency: Holding investments for the long term can lead to more favorable tax treatment, preserving more of your gains.

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So is it better to buy and hold long-term?

Unfortunately, I’ve never been able to locate the original study and Fidelity doesn’t seem to remember it either. The story may be a hoax, but plenty of other research comes to the same conclusion.

A University of California study of 66,000 investors found that the higher a portfolio’s turnover, the lower the average return. Those who traded the most lagged the overall market’s performance by 6.5%. As the researchers put it, ‘trading is hazardous to your wealth’.

The reason is pretty simple: impatience adds ‘frictional costs’. For anyone who shuns a ‘buy and hold’ philosophy, brokerage fees and taxes quickly bite into their returns. The nature of compounding means that small disadvantages in any one year – that may seem trivial at the time – can take a big chunk out of your final payout.

Curiously, the University of California study found that high turnover correlated with underperformance in both taxable and tax-deferred accounts – there seems to be more at play than mere frictional costs. The researchers suggest the culprit may, in fact, be mental: overconfidence.

We tend to overestimate our own abilities – our confidence in our predictions is generally greater than their accuracy. This is then exaggerated by another cognitive mishap called confirmation bias. Once we form an opinion we tend to search for and interpret information in a way that’s consistent with it.

‘Overconfident investors will overestimate the value of their private information, causing them to trade too actively,’ the authors suggest. Overconfidence can cause you to buy and sell at the wrong time; mistakes and frictional costs then pile up.

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How to win at investing…

1. Focus on long-term fundamentals:

If you’re investing for the next 10 or 20 years, try to ignore short-term price movements. Whether your stocks went up or down 3% today probably doesn’t matter. What does matter is whether the company is strengthening its balance sheet, building its underlying earnings power, and whether it has a sustainable competitive advantage. Research from Schroders found that long-term investors have a 0.1% chance of losing money when adjusted for inflation, compared to 39.3% of short-term investors.

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2. Take time and play devils advocate:

Feeling that you need to act on advice immediately is big no-no. The business news is specifically designed to get you excited so that you continue reading, and the more news you consume the more likely confirmation bias and overconfidence will lead you to trade too much. Before making a trade, sleep on your decision for a few days and try to think of the counter-arguments to your investment case. When in doubt, do nothing.

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3. Hold on to great businesses

Senior analyst James Greenhalgh discussed his ‘never sell’ list: a collection of great companies he planned to take to the grave. ‘I’ve learned that selling apparently highly priced but excellent businesses has usually turned out to be a long-term mistake. Wonderful companies can end up creating value over time in surprising ways, whether through internal investment or acquisition. Often it’s simple mathematics. Companies that can reinvest capital at high rates of return can compound value significantly over time’.

Perhaps the best way to counter overconfidence is to always leave a margin of safety between the price you pay and the intrinsic value of the stock to allow for mistakes. If you own a collection of great businesses, bought when they were undervalued, and hold them for the long term, you’re bound to do well.

‘The biggest thing about making money is time,’ Warren Buffett says. ‘You don’t have to be particularly smart, you just have to be patient.’

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Wrapping Up…

Investing for the long-term is and will be your best investment choice. Whether its guidance from Warren Buffett, an evaluation from Fidelity, or a study from the University of California, all reputable sources point to the buy and hold approach as the best strategy for you to build real, long-term wealth.