It has been said (and many books have been written about) that habits play a critical role in achieving success.
While it’s all well and good to set lofty goals, it’s the (seemingly) small and positive habits that we adhere to on a daily basis that will give us the best chance of success in the long run.
This truth applies equally to investing in the markets. It’s true that many investors set big goals and financial objectives, but how many do you think will stick to a daily habit to ensure that they are moving closer to those goals each day?
Here are the top five habits of highly successful investors:
1. Knowing yourself
This may sound cliched, but the reality is that no one knows you better than you do yourself.
In other words, you know your saving and spending patterns, you know your financial strengths and weaknesses and you know your ability to stay focused on the end goal. All these are important and will play a crucial role in your investment strategy.
Knowing yourself means being totally honest in assessing your financial situation while considering your priorities and propensity to spend, to save or to invest.
Other factors to consider are your financial knowledge, the time you have available to devote to investing, the size of your investment capital and whether you are risk-averse or a risk-seeker.
Do you tend to favour a particular stock over another? Are you more inclined to invest in sectors that you know? Do you prefer to buy only in your domestic sharemarket or are you willing to explore and find opportunities in international markets?
2. Setting your financial objectives
Directly related to knowing yourself is setting realistic financial objectives.
Based on all the key factors that you’ve considered under know yourself, then you can set realistic investment objectives.
This will include what level of returns you can realistically expect, the amount of risk you are willing to take and the length of time you are giving your portfolio to grow.
Setting realistic objectives is important because if your expectations too high, you are likely to be disappointed. For example, thinking that you can somehow double your investment year after year is simply not realistic.
On the other hand, if you set financial goals that are too low, for example you are ready to accept 0.5% growth on your investment, you may be missing out on some great opportunities by sticking to non-growth assets.
You need a balanced view when setting your financial objectives and if you know yourself (your investing self), this process should be a lot more achievable.
3. Learning to control your emotions
Markets move in cycles. This is a fact and reality that every investor must come to terms with.
You only have to look at the market falls and recoveries that we have seen over the past 20 -30 years (though you can look further back, even centuries ago) to see these cycles in action.
However, many investors seem to forget these cycles. As a result, they tend to overreact to market falls and recoveries. Many investors get too emotional. Fear and greed are two well-known emotions among investors when dealing with market movements.
If you want to be a successful investor you need to be mentally prepared to ride the ups and downs of the market.
If you become too emotionally involved in your investments, that’s when you are more likely to make costly mistakes. Emotional people tend to act impulsively and find themselves buying when they should be selling and vice versa.
4. Having an investment plan and sticking to it
An investment plan is your blueprint – your map – that will help you navigate the investment markets. Your investment plan should be tied in closely with your financial goals.
While your financial goals may set the high-level financial targets you want to hit, your investment plan should have the details – your plan of action that will drive you toward achieving your goals.
For example, a good investment plan should have the details of which sectors (industries) or stocks you want to invest in and when to revise the allocation.
Most importantly, it should spell out your exit strategy. Whether your portfolio is losing or gaining, it is wise to have a pre-determined exit strategy.
Why? Your exit strategy will ensure that you are able to make rational decisions without the emotions that come either from winning or from losing. If your portfolio is delivering profits, the exit strategy will help you know when to lock in some of those profits.
If the markets have turned against you, an exit strategy will help you take decisive action to cut your losses short, thereby minimising losses and ultimately conserving your capital.
As you can see, an exit strategy is vital whether you’re winning or losing.
5. Learning from your mistakes
We all make mistakes. Even some of the best stock pickers and fund managers don’t always get it right. They also make mistakes.
But the difference between a successful investor and a less successful one is that the former learns from his/her mistakes while the other ignores mistakes and is doomed to repeat them.
When investing, and with your hard-earned money on the line, it is best to admit and acknowledge when you make a mistake. Learn from it and try not to make the same mistake again.
So, you picked a wrong stock and you suffered some losses. If you cut your losses short and get out of the position then evaluate what went wrong, you can pick up some useful learnings from the experience. Hopefully you will not repeat the same mistake again.
However, many investors are afflicted with the tendency to blame others – the market, their brokers, the friend who recommended a stock, the fund manager – anyone and everyone but themselves.
While it may be difficult to do, the best course of action is to take responsibility for all your investment actions. Whether you have advisers or friends who give investment suggestions and tips, you still have the final decision. Whether you listen to someone else’s advice or not, the final decision is still with you.
So, when you make a mistake, be brave enough to own it and learn from it. Most likely you will thank yourself for making a stand and will benefit by learning from that experience.