As more and more people take control on the road to financial independence there has never been such a wealth of information and education available to help investors make informed investment decisions; neither has there been such sophisticated technology at your disposal. If you have FIRE in your heart, here are some things successful investors avoid!
Social media offers the opportunity to exchange ideas and information and many investment platforms allow users to set up portfolios that mirror those of investors they particularly admire and replicate their trading activity.
However, there are core behaviours and disciplines that underpin successful investors and you may wish to give them due consideration as you seek to join their ranks:
Successful investors don’t start without a plan, any more than they would start a road trip without at least a map and a destination in mind. The evidence is overwhelming that random investments made without a plan seldom, if ever, lead to success.
Your investment plan doesn’t have to be fancy, but it should be based on where you are (your current financial situation), the risks you are prepared to take and your destination e.g. financial independence or a comfortable retirement by a certain time in your life.
Your plan should call for specific action steps you will take. Successful investors expect to reach their goals over time, by identifying the right things to do, and then doing those things over and over and over. Saving money regularly is the most basic of these useful behaviours.
Successful investors don’t rely on just one investment, or even a handful. They diversify widely, knowing it’s impossible to reliably predict which investments will go up in value and which will decline.
Diversification doesn’t reduce risk, but it spreads your risk around. Over the long run, this will make your ride less bumpy and more comfortable. And that will make you more likely to stick with your plan. In addition, greater diversification often leads to higher returns.
Successful investors don’t ignore how much they pay for investment services and products. They keep their costs low, knowing that is one of the few parts of the investment process they can actually control.
Over time, those “little” savings matter more than you might think. On a one-time investment of £10,000 that returns 8% over 20 years, cutting your annual expenses by 1% would boost your return to 9%. That would boost your ending value from £46,610 (8% for 20 years) to £56,044 (9% for 20 years). That puts an extra £9,434 in your portfolio – nearly as much as your entire original investment!
Successful investors don’t let the ups and downs of the market throw them off course. They realise that downturns and even bear markets are normal—and that weathering these storms is necessary for long-term success.
They do their best to stay the course, avoiding panic buying when prices are going up and steering clear of panic selling when the stock market is tanking. This isn’t always easy emotionally, but it’s vital to your long-term financial independence.
When I was an adviser, I encouraged investors to build their plans on expected returns significantly lower than the historical averages. Here’s what that means in general terms: If the long-term trend of the stock market is 9%, make your plans on the assumption that your own stock investments will earn 6%. That will require you (or at least strongly encourage you) to save more; that in turn will always serve you well.
If your returns exceed your expectations, you’ll have no trouble adjusting. But if things go the other way, you could wind up short of what you need to retire.
Outside these accounts, investment sales generate taxes. Sometimes even the timing of a simple mutual fund purchase can generate unnecessary tax liability, as when you buy shares closely before a mutual fund’s dividend or capital-gains distribution.
Having avoided the other traps on this list, successful investors don’t get caught up in the incessant financial commentary in the media. Commentators always have at their disposal two ‘lists’ of explanations for whatever is happening and whatever developments seem to be just over the horizon.
The ‘good news’ list is always filled with plausible arguments for why the market will go up and therefore why investors should buy; the ‘bad news’ list is always filled with equally plausible arguments for why the market is overdue for a downward trend and therefore why investors should sell, or at least avoid buying.
Successful investors don’t go it alone. You may connect with others online, you may join an investment club or you may pay a professional for advice; helping with your plan, keeping you on track, guiding your decisions, being there when things get tough.
Make sure you gain from the experience of others – advisors are experts who have spent many hours passing exams and being approved by the regulator and could make a big difference to your outcome; elsewhere there will be an investor with similar goals and circumstances to you – sharing experiences and opinions can be a great way to benefit from the power of the crowd.
You only get one go a retirement planning – paying a little for an expert to guide you on the journey could be a very sound investment – whether that is for regular ongoing advice or an occasional review and financial health check.