Do you want to be a good investor?
Want to know why some people average 8% in their portfolios and others barely keep up with inflation?
After spending years working with investors and studying investor behavior; I’ve determined what makes successful isn’t what they do, but more often, what they don’t do.
11 Things Successful Investors Don’t Do
1. Pay High Fees for Their Investments
Investment fees slowly chip away at your portfolio, and that’s why successful investors keep their expenses low.
Some studies suggest the average mutual fund fee is above 3%. Although I’m not sold on that number, I have seen investors regularly pay 2% or more their investments.
Sometimes this is the “cost” of the mutual funds or a combination of costs of the mutual funds and advisor fees. At any rate, your investments fees should be much lower: Typically around .25%.
If you invested $500 a month for 30 years and earned 8% a year before fees; then you would have $713,001 if your average costs were .25% and only $556,084 if the expenses were 1.50% a year!
A $156,000 difference!!!
2. Wing It
Successful investors don’t just wing it, they have a plan. They know what their goals are and stick to that plan regardless of market conditions.
3. Worry About Market Downturns or Bear Markets
Successful investors are invested for the long-term. This means they understand the markets will sometimes drop 20% or 30% or more.
Instead of selling when the market drops, they stay invested because they understand the market will eventually rebound.
It rebounded after:
- Black Monday (October 19, 1987)
- The Dot.com Bust (1999-2000)
- The Great Recession (2008)
- Start Buying Only After the Market Goes Up
4. Start Buying Only After the Market Goes Up
Investors are funny people because the majority of people like to put their money in cash until the markets recover. Then they invest when everything is expensive.
Unfortunately, when you take this approach, you will typically miss the majority of the market returns and buy when prices are high. This limits your returns.
5. Ignore Taxes
Successful investors don’t ignore taxes. They do whatever they legally can to defer taxes or find tax free investments that fit their plan.
They take advantage of tax-deferred retirement plans (IRAs, 401(k)s, etc.), tax-free retirement options (Roth IRAs, and ROTH 401(k)s, municipal bonds, dividend tax rates, etc.
This also means they avoid paying taxes and penalties on early withdrawals.
6. Disregard Free Money
Smart investors don’t ignore free money.
If you are lucky enough to work for a company that offers a 401(k) plan, then you may have the opportunity to capitalize on free money.
Often the company will match a percentage of your income in the retirement plan. A typical match is dollar for dollar up to 4% of your income. This means if you earn $100,000 and contribute 4%, then your employee will also contribute $4,000.
Over 25 years and assuming a return of 8%; their contributions would be worth. $319,118.
7. Get Emotionally Attached
Getting emotionally attached to your investments is a recipe for disaster.
There are thousands of examples of people who wouldn’t sell a stock that eventually went bankrupt because they were emotionally attached. Whether that reason is that you worked for a company, got an inheritance from your parents, or think the stock will rebound; don’t get emotionally attached.
Successful investors stick to the plan. If the stock makes sense, then they keep it. If it doesn’t make sense, then they sell it.
8. Neglect the History of the Stock Market
Successful investors don’t neglect the history of the stock market.
They understand in the long-term, the S&p 500 can average over 8% or more. They know small-cap stock funds come with more risk. They learned a diversified portfolio is their best option.
9. Watch the Financial News All Day (Every Day)
Good investors are not watching the financial news every day because the day to day news doesn’t impact their financial plan.
It is a waste of time to listen to Jim Kramer or CNBC 24/7. They understand a 200 point drop in one day doesn’t affect their 30+ year plan. Furthermore, they know the history of the markets (See point #7).
10. Worry About What Others are Doing
Have you ever been to a party where someone is bragging about their hot stocks? Successful investors don’t give two shits because “hot stock” tips from your brother-in-law rarely turn out to be great long-term plays.
Again, successful investors only worry about their financial plan and their long-term returns.
11. Take Your Word for It
Many people invest money with “financial professionals” because they have self-deprecating beliefs they can’t understand personal finance.
Well, successful investors take the time to understand and study financial concepts. That’s why if someone is offering you something too good to be true; successful investors will question the recommendation.
If you find yourself doing any of the above behaviors, stop!!! Your investment returns over the long run will be much better!