5 Habits of Successful Investors

Successful Investors Live Below Their Means: Have you heard the saying before? The fact is, most people like myself hate to hear this because it sounds like taking all the fun out of life. I see a shirt at the store that fits me well and I like the design, why can’t I buy it? Because some guru told me to live below my means? Let's approach this concept in a more realistic fashion. Live within your means. It doesn’t matter how good of an investor you are, if you don’t have the capital to invest then you won’t see big returns. Since few of us are lucky enough to inherit money, win the lottery, or marry into wealth, beefing up your portfolio is dependent on education and practicality. The more you can save, the more money you can transition into your investment portfolio where you can make money. At the least, live within your means. Use Senator Elizabeth Warren's budgeting plan. 50% of your income for basic needs. 30% for wants and pleasures. The last 20% is used to set yourself up for success (investment money).

Successful Investors Take Calculated Risks: Warren Buffett tells a story using a 20-hole punch card as the focal point of his narrative. For students getting out of college, Mr. Buffett recommends a total of 20 investment decisions for life as if they only have a 20-hole punch card and when they are out of punches, that's it. And every time they make an investment decision, that is one hole punched leaving one less investment they can make for their entire life. The reason for this illustration is Warren Buffett is stressing the importance of an investment decision. He says, and I quote, “Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.” CDs and T-bills barely keep up with the rate of inflation. High returning assets fluctuate in value, sometimes recklessly and unexpectedly. That's the price of admission you pay when opting into a high-risk investment. Get used to it.

Successful Investors Allocate Their Assets: Assets allocation refers to the method of dividing your portfolio between stocks, bonds, and cash. A diversified portfolio will include subcategories like value and growth, large-cap and small-cap, domestic and international, as well as fixed income subcategories like high yield, high grade, and tax-free. The average active investor allocates his/her assets once every few years but the successful investor does this at least once a year.

Successful Investors Stay Disciplined: A few weeks back I was holding a REIT that dropped by 31% in 3 days. I was in the hole 19% overall. My emotions were telling me that I struck out and this was a failed investment decision. My logic told me to buy more and wait it out. Today my net profit is 35%. Stocks will dramatically fall and rise in price. The disciplined investor listens to his logic and not his emotions. You can't buy and sell on a whim for emotional reasons and expect good outcomes. Before buying stock, make sure they meet your criteria. Same goes for selling. This criteria may include earnings growth, product innovation, sales, or insider buzz. An annual rebalancing of your portfolio while applying trailing stops to individual stocks increases your returns while reducing risk.

Successful Investors Keep a Sharp Eye on Investment Costs and Tax-Manage Their Portfolio: Investment minimums, fund fees, and trading commissions have been coming down for many years now and in many cases are now zero. In the history of trading, they have never been lower. If you are eligible for a Roth IRA, take advantage of it. 9 times out of 10 pre-tax dollars beat post-tax dollars. Retirement accounts are ideal for holding dividend-paying stocks and REITs. Final fact, you owe no capital gains taxes on equities you don't sell. If you sell and make a profit, try offsetting your profit with capital losses when possible.

Can investment success be this straight forward?

Yes and no. The concepts themselves are easy to understand. But filling in the spaces and blanks become the challenging part. An investor's first step is to comprehend the power of good financial habits. The second would be to follow them.

Remember to go easy on yourself. No one is a perfect saver or investor. Unexpected endeavors and expenses occur multiple times throughout a lifetime. Hard times are where you can't save as much as you'd like to.

Cut yourself some slack too. The idea is to strike a balance. (Saving all your life's earnings for retirement is like saving up all your sex for old age. Doesn't make a lot of sense).

You don't have to get everything right all of the time. Although, try to get the big ideas right most of the time. Stay glued to these foundational habits and successful investments will follow.

Good investing,

Dan Sarver