In a presentation organised last month by the Federal Reserve Bank of Chicago, Morningstar’s director of personal finance Christine Benz explained that there are a lot of ways that investors can find success. They can find success through picking individual stocks, or picking mutual funds, or an exchange traded fund, or ETF.
But when she looks across successful investors, she spots some commonalities among their habits. She presented some of them along with Adam Zoll, assistant site editor for Morningstar’s U.S. website.
1) You achieved your goals or are on track to achieving them.
According to Benz investment success isn't necessarily beating the market. “It's not about beating Warren Buffett. It's not about generating returns that are higher than your neighbours or your brothers-in-law.”
She is of the opinion that the determining factor with regards to investment success is whether or not you were able to reach your financial goals. So that means checking your portfolio and savings plan to determine whether or not you are on track to achieving that goal.
Alternatively, it could be funding a child’s education or marriage. Do you think you can achieve that? Or perhaps it could be an even shorter-term financial goal such as buying a new car, or a home or remodeling your existing home. Were you able to achieve those goals?
So, fundamentally, the question of whether or not you are able to achieve your financial goals, or whether or not you have achieved them, should be your measure of your own success as an investor.
2) You had peace of mind along the way.
This may sound weird, but Benz believes that investment success must also be determined with regards to how that goal was achieved. Did you invest in a volatile fund that gave you heartburn? How comfortable were you with the risk taken?
Believe it or not, but true investment success is not just about achieving your goals, but whether or not you were able to achieve peace of mind along the way. So, even if you were, in the end, able to reach your financial goals or maybe save and invest a sum that was way more than you expected, were you able to sleep easily at night?
Balancing risk-taking ability with returns is fundamental to investment success as well.
3) You stayed the course.
Benz believes that it is very important to tune out the noise of the financial media and stay focused on the big picture. “There's lots of information flowing about the markets, and it's important--to the extent that you possibly can--to tune a lot of that out because, ultimately, it doesn't affect your investment success.”
When it comes to checking your portfolio, she believes that less is definitely more. “Generally speaking, the less you plug into the fluctuations in your portfolio--whether good or bad--the better off you'll be. Check your portfolio when it is time to rebalance, don’t go poking into it every time the market is on a roll or plunges.
4) You honed your skills and did not depend on luck.
Successful investors know themselves. They also know the role that behaviour can play in financial decision-making, and they take steps to ward against some of those behavioral traps.
Zoll believes that this psychological or behavioural angle is one of the more interesting elements of investing. He is of the opinion that investors need to ask themselves what has been their experience with money and investing throughout their life and childhood.
For those of you who grew up in a household where saving and investing were encouraged, it may be second nature to you and an obvious thing to do. If you didn't grow up with that as part of your experience, then it may seem like a foreign concept--something you don't know much about. In that case, he suggests that you take some extra steps to educate yourself so that you understand how investing works and make an attempt to to cultivate some good saving habits within yourself.
Zoll also urges investors to think about the kinds of money mistakes you've made in the past; and these don't have to be investing mistakes. Have you fallen for get-rich-quick schemes? Are you subject to impulse buying? Do you often take on more financial risk than you can handle? If the answer is yes to these questions, these may be clues that you really need to watch taking on too much risk as an investor--that you are prone to a certain kind of behavior.
The point Zoll is making is that if you are not aware, your instincts can work against you.
Zoll encourages investors to look at the way they dealt with situations. Think about how you as an investor dealt with the dramatic market experience in 2008 when the market dropped very rapidly in a short period of time. Did you sell out of stocks after they had dropped and swear them off for years? Did you buy more stocks after the market dropped because you said, "Hey, these stocks are now selling at discounts?" By the same token, we've had some very strong markets in recent years. How did you react to that? Did you buy more stocks as the market was going up? Did you stay out of the market ever since 2008 and only then decided to get back in?
And then for those of you who remember the tech bubble of the late 1990s, how did you deal with the tech bubble? Did you buy an unhealthy amount of tech stocks? Did you get burned when the bubble burst?
All of these real-world experiences can inform your own knowledge about the kind of investor you are.
5) You stayed grounded.
Being overconfident is a recipe for disaster; thinking that you know more about what the market is going to do or more about investing than you really do.
Zoll believes that an investor must come to terms with the fact that no matter how much you know about investing, you don't know everything. “You don't know everything that's going to happen with the market. Even if you've had a great run--you've bought some stocks low and you've sold them high and you feel like you're really on top of what the market's doing--that's a recipe for potential future disaster if you become overconfident and start making unwise investing decisions. Even the best investors don't hit homeruns every time they bat--not by a long shot. There are plenty of strikeouts mixed in also.”
