How to be a better investor
I recently read a report put together by Tom Bradley, president of Steadyhand Investment Funds called the Five Essential Elements to Be a Better Investor. The basic premise of the report is that every investor can become better and more successful by focusing on key behaviors. Tom suggests that “There is a significant gap between what markets have done and investors have achieved.” I could not agree more.
Here’s a quick summary of the five ways investors can become better investors
Projecting future returns is necessary but impossible. The advice to be realistic in your return expectation is important but also very difficult because of the variable nature of markets.
That being said, Steadyhands provides some of their benchmarks for future return expectations:
- Bonds – use current yields of 2%
- Stocks over 1 year periods – anywhere from a 25% gain to a 25% loss
- Stocks over 5 years – anywhere from 0% to 12% compound annual return
- Stocks over 10 years – anywhere from 4% to 8%
Not only is it better to be realistic but also err on the side of being conservative
Related article: What rate of return should you use for your retirement plan?
Have a long term plan
When it comes to planning it’s important to have a big picture perspective that goes beyond just the investment portfolio. A good plan not only looks at your total investment portfolio but also how the portfolio is managed to take into account what is going on in your life. A plan is important because humans tend to have short attention spans and investing for retirement is one of the longest endeavors we ever take on.
From an investment perspective, a good long term investment plan starts with a strategic asset allocation strategy where the portfolio is diversified between different asset classes like cash, bonds, and stocks.
Related article: Model investment portfolios
Commit to a routine
Better Investors have a regiment that breeds discipline, patience and courage. Discipline to follow a specific plan. Patience to let it play out over many years. And the courage to stick with it when times are tough.
Steadyhand Investment Funds stresses the importance of developing investment routines around re-balancing, cashflow management and reviewing the asset allocation
Related article: Four disciplines to financial success
Prepare for extremes
In the investment world, we often talk about averages but it’s rare that actual performance hits these average statistics. Instead, we tend to react to extremes both on the upside and the downside.
Remember that down markets are inevitable and necessary for the long term success of the stock market.
Also remember that when markets and investor sentiment are at extreme highs or lows, it’s not a good time to make significant changes to your portfolio you’re your long-term plan.
Be a better CEO
In my personal opinion, most people are not wired to be true do-it-yourself investors. We live in times where investors have more access to tools, information and resources to invest on their own but few people have the time, confidence, passion or desire to invest on their own.
As a result, most investors will have to take the role of a CEO where they delegate investment responsibilities to someone else. That being said, it’s also important to find a balance between getting the help you need and not involving more people needlessly. There’s an old adage that says, “The more people that touch your money, the lower the return.”
Related article: Online guide to working with financial advisors
Five essential elements to being a better investor
If you want to delve into these ideas more, have a read through Steadyhands complete report
Do you think Steadyhand Investment Funds has the right five ideas? Are there any other ideas you think should be added to this list of 5? In a future post, I will put together my list of ideas on how to become a better investor. Watch for it!