5 Behavioral Attributes of Successful Investors
Ron DeLegge, Editor
September 17, 2009
SAN DIEGO (ETFguide.com) – For decades, academians have tried to explain the various reasons people do the things they do with their money. For example, why do smart people make dumb financial decisions? And what separates successful investors from the masses?
An entire field of study known as “behavioral finance” has been dedicated to studying investor’s behavior. Leading researchers in this field include individuals like Richard Thaler, Hersh Shefrin, Terrance Odean, Simon Gervais and Shlomo Bernartzi. These individuals along with many others, have helped us to better understand the human decision making process as it relates to investing.
Let’s evaluate five important attributes of successful investors.
A disciplined approach to the investment process is a key part to investment success. This means not just knowing when to buy or to sell, but knowing what to buy and to sell. In each case, the successful investor makes deliberate and disciplined investment choices. Nothing happens by accident.
What else differentiates the successful investor from the crowd?
The successful investor is unaffected by the dramatic emotional swings of the crowd’s ever changing sentiment. A lack of discipline causes most investors to make financial decisions they later regret. In contrast, the successful investor has complete control of themselves and an unwavering mindset to reach their financial objectives.
Successful investors are in tune with the current market environment along with market history. They understand that history doesn’t necessarily repeat itself verbatim, but often rhymes. They keep track of their investments and make adjustments to tweak their investment plan.
While they are aware of what’s happening with stocks, bonds or interest rates, successful investors don’t necessarily make important financial decisions based upon the day-to-day fluctuations of the market. Likewise, they may read a newspaper or catch a newscast, but they’re not likely to make major financial decisions because of media reports. Successful investors know how to separate important information from unimportant information. They also know when it’s time to “tune out.”
A realistic perspective is a core attribute of all successful investors. Yet, too few investors have this vital quality. “After you buy a stock, you fixate on the possibility that it will keep going up,” says Jason Zweig, author of Your Money and Your Brian (2007). “That thrill is limited only by your imagination.”
Having a realistic investment outlook is most true when things seem to be at their worst.
Instead of complaining about how bad the stock market or the economy is, successful investors carefully evaluate the situation and find opportunity. Where unsuccessful investors see no hope or upside is exactly where the successful investor usually capitalizes. This is especially true during a bear market.
“It’s only common sense to prepare for a bear market,” said investing legend Sir John Templeton. “In fact, your financial planning should provide for additional investment funds so that you can buy when shares are unreasonably low in price.”
The successful investor is a responsible person. They understand and accept the ramifications of their investment choices. They don’t look for excuses or scapegoats by finger pointing when things go wrong. They take full responsibility for their financial decisions or in some cases, their indecisions.
The successful investor is a mature person and doesn’t rely on others for financial support. They show self-respect by saving and investing their money, realizing they’ll probably need it in the future.
One last attribute of successful investors is good organization. The successful investor isn’t likely to have ten different investment accounts in ten unknown locations. Rather, they know where and with whom their money is invested. They also have a clear understanding of how much their investments are costing them and how they’ve performed compared to corresponding benchmark indexes.
Along similar lines, diligent planning motivates the successful investor to make good habits part of their regular routine. Usually, they consistently invest a fixed or planned portion of their income. They coordinate their taxable investments with their tax-deferred retirement plans to maximize their savings.
What type of investor are you? Are you on track to reach your financial goals? Or have you lost focus?
Whatever your situation is, work on applying the behavioral attributes to become a successful investor. Your wallet will thank you.