This post is a continuation of last week’s post dealing with the 10 ideas that all investors need to know to be a successful investor. You can read the first post with items 1 to 5 by clicking here: Ideas 1 to 5 to be a successful investor
While the first five ideas dealt with the understanding that all investors need to have regarding capital markets and how best to participate in the global capital markets, the majority of these remaining five ideas deals with the investors own behavior.
6) Practice smart diversification – diversification house reduce risks that have no expected return, but diversify within your home market is not enough. Global diversification can broaden your investment universe. For while the US stock market has over 3000 companies, the global stock market allows investors the opportunity to own partial shares and 9000 individual stocks.
7) Avoid market timing – you never know when market segments will outperform from year to year. By holding a globally diversified portfolio, investors are well-positioned to seek returns when and whenever they occur. As you can see from the chart below showing the various sectors in the US market and how they perform over the past 10 years, there is a randomness which could not be reliably forecasted.
8) Manage your emotions – many people struggle to separate the emotions from investing. Markets go up and down. Reacting to current mark indicated conditions may lead to making poor investment decisions at the worst possible time. We believe this is the most important reason to have a behavioral financial advisor. All investors have the human emotions of optimism and elation when the stock markets experience large gains and experience fear and nervousness when this stock market experience large temporary losses. The key is to not act on either of these emotional extremes.
9) Look beyond the headlines – daily market news and commentary can challenge your investment discipline. Some messages stirring anxiety about the future while others tempt you to chase the latest investment fad. When tested, consider the source and maintain a long-term perspective. The headlines always deal with what would have worked a year before whether it’s buy gold or sell technology stocks. These headlines have no concept of your individual desires and your individual possibilities.
10) Focus on what you can control – a behavioral financial advisor can create a plan tailored to your personal financial needs which will help you focus on the actions that add value. This can lead to a better investment experience with less worry. The advisor can help you structure a portfolio which will capture those expected dimensions highlighted in idea number #5 discussed in the last post.
Constructing the appropriate portfolio would help diversify the risks, reduce expenses and turnover and help minimize taxes.
Most investors need assistance in maintaining their portfolio targets through time. However, we believe all of our clients need to understand these 10 ideas which will help us help them have the discipline and patience to stay focused on their life goals.
If you enjoyed this article, CLICK HERE to subscribe to free updates from “Roots of Wealth”.