11 Habits of Successful Investors

There is nothing trivial when it comes to accumulating wealth and investing especially if the investors are confused between desired results and avoiding the risk factors. 11 simple yet effective habits can actually help the investors to accumulate the capital in a better and composed way.

Habit No. 1:

Binding Commitment

Make a binding commitment

There are three options that every investor can use to make binding commitment

  1. Strategic also known as long term characteristics should rule the part to various asset classes.
  2. The common rule that every investor should follow is to make sure he not putting all his eggs in same basket which means he need to diversify.
  3. Invest regularly

1. Put strategy before the tactics:

  • It is important that one should put the strategy before the tactics which means invest in the strategy.
  • Investors should decide on the basis of strategy if he wants to invest in equities or in bonds, depending on what suits his risk profile.
  • Strategic asset allocation can be implemented easily with the balanced portfolios. If everything is managed actively, it is easy for portfolio managers to make the tactical adjustments that also without letting the investors to worry about anything at all.

2. Diversification:

Every investor must have come across the term "Never Put All Your Eggs inOne Basket". However, only few investors actually follow this term. Usually there is not a huge point get hold of perfect investment every time and to make continues changes in your portfolio. However, you should not put all your investment in one single bond, equity or asset.

3. Invest regularly:

When it comes to saving plans the rule is same i.e. to earn the risk premiums it is important to take risks, it can be in terms of market risk premium, equity risk premium or inflation risk premium. Though there is no guarantee of the specific performance, there are three effects that can be tactically combined.

  • Diversification Effect: Making investment regularly in your portfolio will give you the chance to diversify in a basket of bonds or equities. The savings can go in different infinite multi asset solutions. Investment diversification strategyis the key to earning high returns from your capital and is preferred by successful investors.
  • Average Cost Effect: When it comes to paying exact amount on regular basis in the saving plans basically means that the shares are basically bought for different amount as they continue to change with the changing trends in capital market.
  • Compound Interest Effect: If you want to earn benefits from compound interest effect by reinvesting distributions than you should save for long period of time.

Habit No. 2:

Challenge Yourself

KNOW WHAT YOU WANT AND CHALLENGE YOURSELF:

If you analyze the lessons that behavioral economics taught over the period of time, you will realize everything comes down to one thing i.e. the functionality of the brain is the result of development process that has been taking place since forever. This is the reason that our brain sometimes shows certain behavioral patterns that were part of historic period and are not easy to be explained rationally.

To break things down let's take some simple example: you as an investor often use a certain frame to view the world of investments. You see whatever you desire to see, keeping a close eye on the loss rather than looking at the better alternatives for better results.

You prefer to go with the flow by following the crowd around you or lean on certain sentiments that keep you torn between the greed and fear of loss.

Before making any decisions, put yourself in a test: if you are playing head or tails and you are at risk of losing 50 CHF every time on tails, before actually willing to start playing this game, how bad would you want the chance of the winning,definitely more than 50 CHF.

This desire more is neither wrong nor right as the only thing that it reflects is your preferences. If you prefer to leave whatever savings you have in a savings account and eliminate the factor of getting returns or simply back off from something just because you fear loss, this can be something very dangerous for an investor.

IF THE HORSE IS DEAD, DISMOUNT:

It is a great thing for you to pay attention to Dakota Indians and their wisdom. They believe in the terms that "If The Horse Is Dead, Dismount".There are still a lot of investors who back in time bought some equities for not more than 60 CHF and even today after decades they are still hoping that prices would return to same type of level.

However, if they had decided to sold those equities and switch to a huge variety of European or German Equities, they might have end up with good return on investment instead they preferred to hold on to their idea of gaining from their equities for a long time.

Habit No. 3:

Fundamental Law

THE FUNDAMENTAL LAW OF CAPITAL INVESTMENT:

A successful investor is well aware of the fact that he cannot simply enjoy the risk premiums if he continues to ignore risk. This is one of the fundamental laws when it comes to capital investment. In order to explain this concept logically lets use simpler terms.

In order to understand the importance of investments in the riskier assets, one should think about the high returns that will be generated from these investments. While on the other hand, the investment with low risks does not bring in high returns.

To understand the above factor, it is important to take a look at the history:

According to the historical time series that is available for equity market of US, indicated that the when it comes to the risk premiums, there is no disappointment, despite the fact that the return for US equity market has not been exactly same all this time

On comparing the risk premium that are on the American stock market to 30-year US Treasuries for over 30 years right from the beginning of given time period i.e. 1801 to almost end of the 2015, it can be seen that 3.7% pointer were generated from the risk premium for over 30 years.

US Stocks vs. US Treasuries

If you look further you will see that the weakest performance period was from 1981 to 2011, has the risk premium of almost -0.85%. Upon analyzing the entire series you will see the effects of the equity premiums from 1901 to 2015.

If the investors had been wise and invested only $1 in the Treasuries back in 1801, they will have earned almost $1550 or even more at the end of the 2015, which means that if your ancestor had invested some capital at that time then you would have achieved 155000% returns on that invested capital.

Habit No. 4:

Don't Speculate To Invest

INVEST, DON'T SPECULATE!

There is no need to track prices movements as well as market in order to find out what is the perfect timing to go in or out. No one will call you and explain you when you should invest and when you shouldn't invest.

However, if you are serious about accumulating the capital for a longer period of time, you would stop speculating and start investing. When it comes to speculation, it is like betting on the price movements but in short terms. On the other hand, investing is all about putting the capital you have in some work that could get you benefits in the long run.

The chart given below shows distinction that is based on the different equity market segments. If you take the example of European equities, you will see that the diversified investments has been made for the 25 years, on average you have earned 8% returns on investment.

Equity Market Segments

However, if you sit back and just wait for the better prices and wasted 20 best days then you have gained 2% or less. On missing 40 best days, the loss will be of 2-3%. It is better method to make your money do the work. Moreover, when it comes to missing some of the best days, it is extremely of high risk.

Habit No. 5:

Contract

MAKE SURE THE INVESTMENT SOLUTIONS THAT YOU MAKE ARE GOVERNED BY "PURCHASING POWER PRESERVATION" BUT NOT "SECURITY"

Your investment decisions should be governed by "purchasing power preservation" rather than "security". The world seems to move around the idea of security and the term "security" is mostly used as a safe world when there is no price fluctuation.

During the past few years, equity market is the one that has sent the investors on the roller coaster ride. In the circumstances, it is understandable that the investors prefer to avoid the price fluctuations.

However, they are so busy with being safe in terms of price fluctuation that they almost overlook risk of the losing purchasing power that happens to be very unpleasant given the fact that currently the interest rate on the saving is 0.

You cannot take government bonds as solution to everything. During the mid of 2016, almost half of the government bonds are in the negative yields especially the one that are in chf zone. The only so called "security" that the investors have with them is knowledge about the fact that the return is going to be less than the invested amount.

This is the reason that if you aim to preserve the capital than you need to make sure that you are not focusing only on absence of the price fluctuations. "Purchasing power preservation" should be minimum requirement for the investments.

To explain how quickly inflation can destroy the purchasing power, a simple example is mentioned: Let's say you hid 50 CHF under the pillow. As per the rate of inflation that is in Europe of only 2% per year, in 10 years time you will be likely to buy goods that are worth just over 30 CHF and less than 20 CHF after 20 years.

Inflation Rate

Furthermore, if this hypothetical rate of the inflation goes to 4% then in almost 10 years, the worth of your money will be less than 30 CHF and for next 20 years, you won’t be able to buy any goods that cost 25 CHF.

Habit No. 6:

DON'T PUT OFF TILL TOMORROW WHAT YOU CAN DO TODAY

There are millions of the CHF that are sleeping in the saving books while you are waiting for another day to go by. For the long term saving plan, there is different perspective of the compound interest effect. Let's take an example: An investor aims to have almost 100,000 CHF with them during their retirement.

If they decide to have an early start, aiming to get closer to their goal in next 36 years, saving almost 50 CHF every month is enough with average return of almost 7.50%. However, if the investor has only 12 years to reach their goal then they need to save almost 400 CHF every month. Waiting for tomorrow and assuming that the market will go according to your plans is a waste of time and resources.

Habit No. 7:

GO FOR PASSIVE INVESTMENT:

Another habit that most of the successful investors have is that they prefer to go for passive investment strategy. The passive investment is all about the long term benefits. Investors prefer to keep their investment minimum and earn high returns in the long run. No investor wants to pay extra money in the name of the extra fees or charges.

Passive investments have no extra fees involved with it. A wise investor knows that relying on the value of gold can be tricky. However, passive investing has nothing to with the price of gold going up or down. While investing in the passive investment, the investors do not have to waste their time evaluating the company reports; instead they can focus on their decision about making better investments.

Furthermore, passive investment is all about transparency. The investors have a clear vision of what their funds are holding which makes it very predictable. The predictable nature of the passive investment makes it easy for investors to make their decisions.

Habit No. 8:

Money

LOOK FOR COST:

You decided to make investment put your money to work and now you are getting done with some of the important steps. However, if you want to be a successful investor then you need to adopt the habit of the successful investorsi.e. look for the cost. You might have decided to that you want to buy certain equity or the government bonds are the best option for you and you are all set to buy them.

However, before you put a seal to your decision what you need to do is look for the cost. A lot of immature investors' thinks that looking for the cost is waste of time and will cause delay in making their decision which is true sometimes. However, there are a lot of times when peaking into cost of different equities or bonds can actually be of help.

There is no denial in the fact that the stock market is always fluctuating which means that the cost might go up and down after different intervals. Looking at the cost of equities might help you to save money and make a better decision that can bring in high returns in the long run.

Habit No. 9:

Research Before Investing

RESEARCH AND CHECK YOUR INVESTMENT DECISION AND THEN STICK TO IT:

Taking risks while making investments is one of the common things that a successful investor do. However, what they don't do is go in blind. A successful investor prefers to do his research before he is ready to make an investment decision.

Investing itself is a tricky thing in which you are expecting for some benefits in the long. It will be complete disappointment if you don't end up with best return on investment as you expected it to be. This is the reason that you need to research a lot.

If you are investing in a company's stock, start with evaluating its performance report. Check how many ups and downs the company has been through. Before signing any investment deal, make sure you have read all the terms and conditions and there are no hidden charges that might pop up when you start enjoying the benefits that were promised.

The next thing that you need to do once you have done your decision is stick to it. Your research means nothing if you are double minded personand do not have any ability to sticking to your decisions. The investment is all about firm decision making skills which is why you need to stick to your decision.

Habit No. 10:

INVEST YOUR MONEY IN THE RIGHT TEAM

A perfect leader is the one who has the best team and know how's to manage it. A lot of new investors do not understand the importance of a good team when it comes to investment. However, a successful investor knows how important it is to have the right team.

To explain things in a better way, let's take a simple example. You have a task to build an apartment in 30 days and you know it is an extremely difficult thing to do. However, if you manage to gather 10 people who are dedicated towards their work and do not give up easily then you can pull off this task with a lot of efforts put in by each and every member of your team.

On the other hand, if you are asked to paint the same apartment and you have 20 people with you but they are neither dedicated nor experienced enough then even if you complete painting the house within given time there will be hardly any finesse in the work done.

Keeping this thing in mind, a good investor always prefer to have experienced and professional members in his team. Having experts in your team is the key to staying your life with the constant worrying and frustration. You do not have to do monthly researches, check market rates, evaluate reports or worry about the fluctuating prices as his team will be there for him carry out all these task.

Habit No. 11:

Invest in Approaches

INVEST IN APPROACHES:

A successful investor aims on moving forward in life instead of going backwards. Have you ever seen a car moving in reverse and still winning the race? The answer is no because it is not logical. Investment is more about taking in consideration what will happen in future and focusing less on what happened in the past.

There is no doubt about that fact that the research about performance of any company or stock helps you to make decision about your investment. However, you need to make sure that your decisions are not based solely on history.

Let's take an example: 50 years back your grandfather invested in a company which ended up with high returns. Now you finally have enough capital to think about the investment and looking for investment options and other capital management solutions.

Just because 50 years back your grandfather has earned success by investing that company doesn't mean that you owe it to the company or you need to follow his steps. Your decision about that investment should be based on the current performance of the company but not on your sentiments or emotional attachment.

Moreover, you should focus more on long term benefits rather than focusing on company that offer one time quick profits to you like it did for your grandfather in the past. For example a long term investment or commodity trading approach and not in historic statements as history might not repeat the same.


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