Have you ever embarked on a home improvement project? You are confident you can complete the task, but you are unfamiliar with the details. A “how-to” clip is usually available on YouTube, but there isn’t a practical way to reach out with follow-up questions. It would help if you had guidance from a caring individual. That is where your local home improvement store comes into play. I have usually had good luck with True Value. The employees not only know their craft exceedingly well but are excited to share their ideas.
What I’ve learned through various projects in life is a relatively simple concept: “Experience isn’t the best teacher–someone else’s experience is.”
Of course, I understand that there are differences between a financial plan and a home improvement project. But I draw up the analogy because they have one commonality–the educational component links them.
In fact, being a lifelong student might be the first principle of becoming a great investor.
So, let’s get started.
1. Create a long-term investment plan and follow that plan
Back 50 or 60 years, the choice of investment vehicles was limited. Today, there has been an explosion of investment vehicles. It provides us with options, but options create complexity and even confusion for all but the most experienced investors.
I have assisted many of you in developing a long-term financial plan designed with your financial goals in mind.
Great investors have a financial plan. It becomes our guide. It is a financial roadmap that puts you on the best path to your financial destination.
2. Learn to control your emotions
Successful investors learn how to control their emotions.
Most of us remember Mr. Spock from the original Star Trek series. He was half human and half Vulcan. His Vulcan half made him the epitome of rational thought, and he rejected emotional responses. However, we don’t need to be Mr. Spock if we have a well-thought-out financial plan. The plan is grounded in empirical research. It keeps us on track when storm clouds gather.
I recognize the plans I recommend are not bulletproof, but I am confident they put people on the long-term path to reaching their goals. I also know that when volatility strikes, some folks take it in stride while others want to take a detour from the plan. They are tempted to react emotionally. While heading to the safety of cash may feel good in the short term, I’ve seen the anguish of those who have opted for the sidelines near a market bottom and then watch in dismay as shares began to climb. Remember, longer-term, markets rise in most years.
Recall 2008. According to a Fidelity study, “Investors who stayed in the markets saw their account balances grow 147%” between Q4 2008 and the end of 2015. “That’s twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.” Stocks bottomed in early March. Even worse, over 25% who sold out of stocks during that downturn never got back into the market.
The opposite is true, too. Don’t become overconfident when stocks are surging. Some folks begin to feel invincible and are tempted to take on too much risk. It gets them into trouble again.
Sticking with the plan helps to avoid mistakes that can be costly in the long run.
3. Become disciplined and be patient
As the control over emotions, a financial plan helps to enforce discipline. By design, the plan puts you on a gradual path to wealth accumulation, which encourages patience. There are no shortcuts. Remember the dot-com boom? Like shooting stars, fast-growing companies soared into view for a brief period before fading into obscurity.
The legendary investor Warren Buffett sticks to what he knows best and invests over a very long time horizon. His disciplined approach and his patience have brought him rich rewards.
4. You must diversify
Here’s a principle I live by: a one-investment portfolio is too risky. Diversifying among stocks, bonds, cash, real estate, and commodities doesn’t guarantee there won’t be short-term losses. Still, it significantly reduces risks and allows you to participate in investments rooted across the U.S. and global economy.
5. Never lose a healthy level of skepticism
A good investor asks questions. Following simple but time-tested principles can prevent fraud. Be wary of investments that promise riches or offer returns that are too good to be true. Today, a con artist won’t use the phrase “get rich quick.” But you will see ads that hype strategies that have quickly turned a meager sum of cash into a big pile of wealth. Such claims should be viewed with a healthy level of suspicion. If these strategies worked, wouldn’t high-powered institutional investors implement them? They don’t. If you come across such a tempting scheme, please ask me to review it. I promise to offer you an objective analysis.
Let me sum this up by getting back to the foundation, or the cornerstone, of becoming a skilled investor. Become a lifelong student. Never stop learning and immerse yourself in the principles I have shared.
If you need assistance on any of the points or discuss any other matters, I am happy to be of service. Please email me at iallen@StalwartPlanning.com call me at (910) 867-8464 in Fayetteville or (919)627-1567 in Durham we can talk.
Author
Isaac is a Fee-Only (no products sold) Certified Financial Planner® Practitioner. Isaac founded Stalwart Financial Planning with offices in Fayetteville NC and Durham NC. Isaac provides comprehensive planning and investment management services to individuals from all walks of life. Isaac can be reached by phone at 910-867-8464, or by email (iallen@StalwartPlanning.com). Visit him at Stawart Financial Planning www.StalwartPlanning.com.