[Editor’s Note: This guest post was was originally written by Adebayo Fasanya from Dr. Breathe Easy Finance.]
The investing maze is complex and it can be very difficult to find the best and most effective way to navigate through it. Good news!! There are 7 habits that highly effective investors use regularly to simplify this complex world of investing and separate themselves from the herd.
Many people believe they have to hold a contrarian philosophy or get some insider information to succeed. While those could help, I believe behavior and how one uncovers information is the most pivotal step in figuring out the best way to invest.
From my experience, investing can be as simple or complex as you want it to be.
The 7 habits of highly effective investors
1. Learn how to invest on your own.
This is the biggest point of all.
We talk about DIY a lot on our blog because that’s what we do and encourage others to do. In fact, our whole site is dedicated to helping high-income professionals manage their own money.
Only resort to hiring a fee-only advisor as a starter or when you absolutely can’t do it yourself.
I promise you, if you keep at it, you’ll learn very quickly and unlock the power to manage your own money instead of handing your money to others to invest for you.
One of my favorite sayings is – “no one cares about your money as much you do.” No one!
This is the main point as acquiring the ability to invest on your own is the best way to make certain no one is trying to screw you over.
Since advisors don’t have to be fiduciary anymore, what’s stopping them from selling the highest fee or commissioned product to you?
Not that I’m against advisors, just the ones that don’t have your best interest in mind. Also, even if you hire one, you can put your heads together to come up with the best strategy possible. You’ll feel better about the joint decision than if you solely rely on someone else to manage your money.
2. Develop a set of investment rules that you do not waver from.
We’ve all read those articles about the newest stock in town that will be the next Amazon.
Investing is different from relationships. While emotions can improve a relationship, emotions will ruin your financial sense if you’re not careful.
Having an investment rule is akin to having a personal finance mission or policy statement. For example, if you have it written in your investment policy statement that you would not invest in individual stocks, don’t get carried away by the spectacular return promised to you by a new stock that just had IPO (initial public offering).
Ok at least, before you change your rules, have solid evidence behind it and research.
Remember when you took an exam and you changed your answer from the right answer to the wrong one? Yep! It hurts. That felt worse than if I’d clicked the wrong choice from the start.
An example of personal finance rule is our viral post where we showed our love for Dave Ramsey and also showed how he is outdated – 12 toddler steps to financial freedom
Whenever we go astray, we come back to the drawing board – aka – the toddler steps to remind ourselves of the big picture.
3. True wealth is not just about making money.
Many people think the purpose of wealth is to say you have a bigger account balance than your friends.
Even the bible said: “What shall it profit a man if he shall gain the whole world, and lose his own soul?” (Mark 8:36 King James Version (KJV)).
We’re not here to debate about heaven or hell, but you get the idea. You want to be well rounded to be truly wealthy.
I found this awesome formula online while researching this topic and it is literally the best formula I have ever seen.
Happiness = (friendship+trust) × (money+courage+independence)
As you can see from the formula above, to be truly happy, you need a combination of friendship, which leads to trust, on one hand, courage, independence, and money on the other hand. Even money cannot stand by itself.
Don’t let investing and money consume your life. Maybe it’s OK in the beginning perhaps (paying off debt), just enough time to learn enough to customize your investment style to suit a more favorable way of life.
The most effective investors are able to maintain a balance. They are rock stars in investing and also have time for friends and families. This is an aspect I am working on personally also.
I recommend you read this post about the formula for happiness.
This is the exact same reason in our post about the 5 pillars of money every parent need to teach their child, we stressed on letting your kids understand that money is not everything and that giving back is compulsory.
4. Don’t enter investment opportunities you don’t fully understand
Don’t invest in anything without doing your due diligence. No month passes without someone pitching me on a new investment opportunity.
Don’t blindly invest in a business or stock because someone else, even a close friend or family member, tells you that there’s no “downside” with unlimited upside.
In fact, whenever you hear the word “no downside” in the same sentence as an investment, stop right there. Don’t go any further; just say you have no interest in learning more. Why? Because that’s the groundwork for either a scam or a big fat lie!
No investment is risk-free. You have to understand that concept. No downside = red flag.
Take the time to fully understand whatever you want to invest in.
In our first book review – the richest man in Babylon, Arkhad gave his hard earned money to Algamish to invest in jewelry. The problem was, none of them know anything about jewelry or investing. Of course, the money went away, disappeared into thin air.
There’s no such thing as an investment with no downside. The most important thing is to know the risk versus the reward and make your move if it’s acceptable to you.
5. Volatility does not equal risk – Understand this concept fully
Every successful investor has hit some home runs in their lifetime. This required investing in assets that have some considerable volatility. At the end of the day, only your absolute returns matter.
If this requires having to invest 15% of your portfolio in much more volatile assets than the rest of the 85% of your portfolio, and out of that 15% the chances are high that some will lose money but the chances are high that some will end up being enormous home runs, it’s much better to invest this way than to invest 100% in assets that you expect to return 8% a year.
Effective investors take very calculated risks in assets that have high levels of volatility to earn returns that blow the average investor out of the water. Again, investing like this is not riskier than the guy that conservatively invests.
In fact, the conservative investor is taking the greater risk, because he or she has a much higher probability of never getting rich. Effective investors ensure that not only do they understand this concept, but that they effectively apply it as well. The overwhelming majority of financial consultants employed by large global investment houses don’t understand this concept. That is why habit #1, Learn to invest yourself, is so important.
6. Employ the long tail of investment analysis and investment strategies to vastly improve your returns.
The flattening of the world and increased accessibility to top-notch financial, corporate, and political information has created a drastic shift in the most effective investment strategies.
Just Google “Long tail of investment strategies” and the “Long tail of investment analysis” to find more information about this.
7. No highly effective investor utilizes diversification to become wealthy.
It simply can’t be done. Specialize, specialize, specialize. Become an expert in several asset classes and find the best investment opportunities in these asset classes.
Join an investment club with other experts and leverage all the expert knowledge to find the best investment opportunities, not in your country, but the best investment opportunities in the world.