If investing was easy, we would all be millionaires. Despite what you may have been told in the financial media, the vast majority of the investing public are below average investors. For obvious reasons, the financial services industry wants us to believe that we can all make “loads of money” investing in stocks, bonds, mutual funds, real estate, and other asset classes. This is simply not true. In fact, successful investing is no different than any other profession or skill. It takes years of practice, hard work, tenacity, and dedication. A successful investor is analogous to a successful carpenter, plumber, mechanic, computer programmer, medical doctor, or any other profession or trade. Each profession has its own unique set of skills. So, what does it take to be a successful investor? Let’s examine the details.
Investor Versus Trader
Before we discuss the characteristics of a successful investor, we need to distinguish the difference between an investor and a trader. The main ingredient that separates a trader from an investor is “time.” Investors have a long-term time horizon. For example, it’s not uncommon for investors to hold a particular stock or mutual fund for several months or even several years. Arguably, the greatest investor of all-time is Warren Buffett. On several different occasions in television interviews, Buffett has mentioned that he prefers to remain invested in a single company for 15 to 20 years. A few of Buffett’s favorite companies have never been sold. For example, he initially purchased shares in Coca-Cola in 1987. Thirty-three years later, Buffett still owns Coca-Cola. Buffett is a classic example of a true investor. On the opposite end of the spectrum, traders have a very short-term time horizon. Quite often, traders will buy and sell the same security multiple times per day. For the purpose of this article, we are focused on investors.
Five Characteristics Of Successful Investing
There are several important characteristics that define a successful investor. However, the general consensus among the investment community is that the most important characteristics are patience, risk aversion, asset allocation, knowledge, and discipline. Let’s briefly review each characteristic.
Unfortunately, most people lack the patience to become successful investors. The vast majority of investors (particularly new investors) are under the impression that idle funds sitting in an investment account must be immediately put to use. In other words, they don’t have the patience to wait for a decent investment opportunity. They are constantly chasing the next “hot stock.” Of course, this is a recipe for poor performance. Warren Buffett is an incredibly patient investor. According to Berkshire Hathaway’s recent annual report, Buffett’s firm is holding a record amount of cash, $137 billion. Buffett is patiently waiting for a good investment opportunity. This is another example of why Buffett is such a successful investor.
On the surface, it would appear that risk aversion would lead to sub-par performance results. After all, investors who are fearful of taking risks will never achieve an adequate rate of return. This is true to a certain extent. All successful investors must take risks in order to make money. However, truly successful investors have the ability to embrace the appropriate amount of risk at the right time. In other words, they become risk-averse when circumstances call for it. Conversely, they know precisely when to accept a higher level of risk as a means to substantially increase their rate of return. Knowing exactly when to decrease the level of risk in an investment portfolio is an art, not a science. There is no “magic” set of rules to follow. It takes years of practice.
Asset allocation is probably the cornerstone of successful investing. What is asset allocation? It is the means by which investors diversify their portfolios among various asset classes as well as sectors within each asset class. For example, an investor may have an allocation of 40% stocks, 35% bonds and 25% cash. Inside the stock allocation, the investor could be exposed to domestic equities, foreign equities, large-cap equities, small-cap equities as well as various stock market sectors. Based on surveys conducted by global investment firms, the majority of investors claim that asset allocation is the most difficult part of investing. It’s not surprising that investors struggle with asset allocation. Why? Because there are so many different investment products to choose from. Many investors become overwhelmed with asset allocation. Without question, asset allocation is critically important to becoming a successful investor.
Have you ever heard the expression, “Knowledge is power?” This is particularly true as it relates to investing. Successful investors come from many different walks of life. However, they all share one common trait. They have a love of reading, particularly books about investing. Successful investors were not born with the ability to achieve high rates of return. Instead, they had to learn the art of successful investing. They gathered knowledge by reading and studying. If you want to become a successful investor, acquire as much knowledge as possible.
Successful investors have the discipline to follow a specific plan of action. Developing an investment plan is very important. However, the plan is useless unless an investor has the discipline to implement the plan and follow the plan. As a general rule, most people lack the discipline to adhere to a game plan for any length of time. This includes investing. Therefore, if you want to be a successful investor, practice becoming more disciplined in all areas of your life.
Whether we like it or not, most investors will never achieve the desired level of success in regard to above-average performance results. If you find yourself struggling to become a successful investor, you may want to consider joining forces with a licensed investment professional.
Do you need help developing an appropriate game plan for becoming a successful investor? If so, you might consider meeting with a licensed investment professional. Angelica Roxas has been a licensed investment professional for almost 20 years. She is a financial strategist specializing in helping clients develop specific investment plans in regard to asset allocation, retirement solutions and tax strategies. In addition to being President of Strategic Asset Preservation Inc, Angelica is also the Founder and President of South Bay Tax Solutions. She is an expert in helping her clients understand complicated financial matters.