The 5 Habits of Successful Investors

Be clear about your investing goals. Are you planning to pay for your child’s education? Or perhaps you want to help fund your retirement. No matter what your goals are, capture them in an investment plan. This will help you stay focused on why you’re investing, rather than on short-term market fluctuations. This goal-based approach will also help you think about your investments as a portfolio, instead of getting caught up in how each individual investment is performing. Rather than having a single portfolio for everything, you can have a portfolio for each major goal. For example, retiring in 25 years would be one portfolio, while saving for a vacation in 3 years would be another portfolio. The purpose of each portfolio will determine the mix of investments you hold in it. 

Investors are often taught to be prudent or careful with their investments, but it’s important to think of risk in relation to achieving your goals, rather than the financial terms that are often listed on a fact sheet for a mutual fund. Say an investor is saving for retirement 25 years from now: they could, and probably will, have a few volatile years and still be on track for their retirement. Alternatively, they could eliminate all market volatility by holding cash and GICs but fall short of their retirement goal. Prudence is not about avoiding risk but taking the right amount of risk to achieve an investment goal.

Try to recognize when your emotions and behaviours could potentially get in the way of growing your wealth. An example of this is performance-chasing, where an investor buys a stock or asset because it has recently gone up in price. Quite often, this momentum reverses and the investor sells in a hurry to avoid a large loss. This pattern of buy high, sell low, prompted by over-confidence, the illusion of control and following the herd, is a key example of how investors often underperform compared to the simple strategy of buying and holding a diversified portfolio. The large majority of individual investors — together with a good number of professional investors — don’t have an edge when it comes to selecting individual securities over the long term, which is why it’s wise to diversify.

Think in terms of probability and try to put the odds on your side. For example, over long periods investors will typically benefit from holding a diversified portfolio of Canadian, U.S. and international equities, rather than holding only Canadian equities. However, over the short to medium term, there were periods when a Canadian stock index turned out to be much better than a U.S. stock index: During the 2000s, the Canadian market benefitted from a commodities boom while largely avoiding the technology and housing crashes that occurred in the U.S. On the other hand, there were periods when a U.S. stock index turned out to be much better than a Canadian stock index: During the 2010s, the U.S. was the driving force behind a global technology boom. When investors don’t consider probabilities, they may be tempted to assume that a recent trend will continue in the future: for example, that the U.S. did poorly in the 2000s and could be expected to do poorly in the 2010s. When investors think in terms of probabilities, however, they realize that financial markets are very hard to predict. As a result, they diversify to avoid investing too much in a single low-performing market.

Think about how long your time horizon may be. For example, a Canadian at age 40 is investing not just for 25 years until retirement, but possibly even longer while in retirement. While results matter, being patient in monitoring your progress can help lead to success. If investing for a period of 25 to 50 years, review the total return of your portfolio over periods of 5 to 10 years, rather than what’s been happening over the last month or quarter. When you plant an oak tree, you don’t dig it up every month to see how it’s doing. Patience is the soil in which the other important habits of successful investors – purpose, prudence, psychology and probability – tend to grow and thrive.