- Too frequently we invest emotionally rather than rationally and reacting to our emotions can hurt our results.
- Focus on what you can control—not on what you can’t.
- The good news is that you don’t have to be clairvoyant to be a successful investor. Our five key steps can help.
As Benjamin Graham, the renowned father of value investing once said, “The investor’s chief problem–and even his worst enemy-is likely to be himself”.
Not convinced? Well how many times have you been in a social situation in which someone proudly trumpets their latest investment success or shares a surefire recommendation with you? As sincere and helpful as they may appear, they rarely put their “great investment idea” within the context of their other investments—both the good and the bad. Yet, we frequently give our well-intended acquaintances the same credibility as any other investment information source.
At some point, our emotions take over and the due diligence that we would normally conduct for important decisions, such as buying a car, is thrown out the window.
We simply aren’t wired to be disciplined investors.
It is well documented that following a reactive style of optimism and fear may lead to poor decisions at the worst times. However, most investors find themselves tempted to make changes to their investment programs simply in reaction to the headlines of the day. Don’t fall into that trap.
Reacting at the wrong time can be very expensive as the chart below illustrates. For example, an investor who missed out on the 15 single best days in the S&P 500 from 1970 through 2013 saw his or her results cut by more than half. Missing only a few random days of strong performance can drastically impact your overall portfolio performance.
The bad news? The good days are unpredictable. They are essentially random. You just can’t time the markets.
The good news is that you don’t have to be clairvoyant to be a successful investor.
Five keys to being a successful investor
You just need to do the following:
- Create an investment plan to fit your needs and risk tolerance.
- Structure a portfolio around dimensions of return and evidence.
- Diversify broadly.
- Manage expenses and turnover.
- Minimize taxes.
No one can reliably forecast the markets direction or predict which stock or asset class will outperform. If they could, they certainly wouldn’t give the information away for free on CNBC or whisper it in your ear at a cocktail party.
Charles P. Boinske, CFA
620 Lee Road
Wayne, Pa. 19087