Habits of Successful Investors
When Stephen Covey’s bestselling book “The 7 Habits of Highly Effective People” took off in 1989, it emphasized universal principles, mainly based on one’s character. A wave of prescriptive self-help books, videos and articles followed, with applications in many fields, including finance.
Here is a compilation of some guidelines from a variety of sources.
Some guidelines for regular investors
The following habits are divided between behavior and education. This list is not so much intended for ultra-high-net-worth, highly sophisticated individuals who have access to exceptional advisers and products. In fact, the ultra-wealthy also exhibit risk profiles different from more typical investors and may be willing to take on extra risk, knowing that their basic life needs are already met.
These principles also distinguish between investing and trading. The former takes a longer-term approach, with a view to wealth accumulation, retirement or inheritance planning; the latter focuses on maximizing short-term profits.
10 habits to cultivate
- Make a long-term financial plan and stick with it — creating a simple plan can help you ride out market volatility if you commit and adhere to it. Discipline is key. Besides, your investments should gradually compound, and compounding is said to be the eighth wonder of the world!
- Diversify — it’s the only free lunch. Spread your investments across stocks, bonds and cash in a variety of regions and industry sectors.
- Be tax efficient — taxes alone should not dictate investment decisions, but consider tax treatments for the funds you place in different accounts.
- Invest consistently — investments can be made at regular intervals instead of as lump sums. Dollar-cost averaging is an example.
- Keep an emergency fund — liquid assets are there for crises, like unemployment or a medical emergency. Keeping funds on hand to weather three to six months can shield you from dipping into retirement accounts or resorting to fire sales.
- Maintain realistic expectations — don’t chase trends or expect to profit every time. Fear and greed are your worst enemies.
- Don’t be tempted to time markets — over time, it doesn’t work. Even the most prominent investors who try to navigate fluctuations will often come to grief.
- Engage and trust qualified professional advisers — hire a knowledgeable attorney, accountant and investment adviser. It may seem expensive, so do the homework carefully to line up an honest expert team.
- Allocate assets — studies show that top-line allocation — such as stocks, bonds and cash — is much more important than picking securities. It is by far the most critical element in portfolio returns.
- Be decisive — planning to do something is not the same as actually following through and doing it. Assess an appropriate and prudent risk level for your situation and goals, and take action. Don’t just talk about it.
You are your own best investment
Self-education is an ongoing lifelong pursuit for managing your own finances and investments. As Warren Buffett said, “There’s one investment that supersedes all others: Invest in yourself.”
- Do the research — it may feel like drudgery, but take the time to understand any investment in which you are committing money. Remember that it took hard work to earn that money, so make the effort to do the research and make informed decisions before you fling your money around too casually.
- Learn what makes investors tick — some basic behavioral psychology can help you identify and control bad instincts, such as herding, anchoring, framing and mental accounting. Read about or ask your adviser to tell you more about those all-too-human tendencies!
- Think in terms of probabilities or likelihoods in markets. Understanding probability is the closest we can get to envisioning the future. It is “probably” the best thing you can do to get the odds on your side.
- Follow the financial press — develop an analysis of trends and underlying factors by reading clear and basic articles in newspapers and online. Learn more about companies, industries and market trends.
- Travel — roam around the U.S. and other countries if you can. It truly does broaden the mind and inspire new ideas for investing.
Talk to your professional advisers about how to follow these goals. They will be able to give you practical tips for your own circumstances.