The most successful investors did not appear overnight. Learning the intricacies of the financial world and your personality as an investor takes time and patience, not to mention trial and error. In this article, we'll walk you through the first seven steps of your investing journey and show you what to pay attention to along the way.
Key Findings
- Your investment journey begins with a plan and time frame; When you know how long you're investing for and what you hope to gain, you can create a structure to achieve that goal.
- Then learn how the market works, figure out which investment strategy is best for you, and determine what kind of investor you are.
- Be careful who you take advice from and be aware of your own biases and assumptions as you find the right path for you.
- Make sure you understand that this is a long-term journey so you don't get derailed by short-term setbacks; always remain open-minded and learn from your mistakes.
1. Getting started with investing
Successful investing is a journey, not a one-time event, and you need to prepare as if you were embarking on a long journey. Start by deciding on your destination and then plan your investment journey accordingly. For example, do you want to retire in 20 years at age 55? How much money will you need for this? You must ask these questions first. The plan you come up with will depend on your investment goals.
2. Know what works in the market
Read books or take an investing course on modern financial ideas. People who put forward theories such as portfolio optimization, diversification and market efficiency have received Nobel Prizes for good reason. Investing is a combination of science (financial fundamentals) and art (qualitative factors). The scientific aspect of finance is a good starting point and should not be ignored. If science isn't your forte, don't worry. There are many texts, for example Stocks for the long term Jeremy Siegel, who explain high-level financial ideas in a way that's easy to understand.
Once you understand what works in the market, you can come up with simple rules that work for you. For example, Warren Buffett is one of the most successful investors in history. His simple investing style is summed up in a famous quote: “Never invest in a business you cannot understand.” This served him well. Although it missed the tech boom, it avoided the subsequent devastating bust of the 2000 tech bubble.
What kind of investor are you – a maverick, an adventurer, a caregiver or a celebrity?
3. Know your investment strategy
No one knows you and your situation better than you. This way, you may be the most qualified person to invest on your own – all you need is a little help. Identify the personality traits that will help or hinder you from investing successfully and manage them accordingly.
A very useful behavioral model that helps investors understand themselves was developed by fund managers Tom Baylard, Larry Beale and Ron Kaiser.
The model classifies investors according to two personality characteristics: mode of action (cautious or impetuous) and level of confidence (confident or anxious). Based on these personality traits, the BB&K model divides investors into five groups:
- Individualist – Cautious and confident, often taking a do-it-yourself approach.
- An adventurer is fickle, enterprising and strong-willed.
- Celebrity is a follower of the latest investment trends
- Guardian is a highly risk-averse, wealth custodian.
- Straight arrow – shares the characteristics of all of the above equally.
It's no surprise that the best investment results tend to come from mavericks, or those who demonstrate analytical behavior, confidence, and a strong sense of value. However, if you determine that your personality traits resemble those of an adventurer, you can still achieve investment success if you adjust your strategy accordingly. In other words, no matter which group you belong to, you must manage your fixed assets in a systematic and disciplined manner.
4. Know your friends and enemies
Beware of false friends who only pretend to be on your side, such as some unscrupulous investment professionals whose interests may conflict with yours. You should also remember that as an investor you are competing with large financial institutions that have more resources, including greater and faster access to information.
Keep in mind that you are potentially your own worst enemy. Depending on your personality, strategy, and specific circumstances, you may be sabotaging your own success. The Guardian would be going against his personality type if he were to follow the latest market trends and seek short-term profits. Because you are risk averse and concerned about preserving wealth, you will be much more affected by the large losses that can result from high-risk, high-reward investments. Be honest with yourself, identify and change the factors that prevent you from investing successfully or take you out of your comfort zone.
5. Find the right investment path
Your level of knowledge, personality and resources should determine the path you choose. Typically investors use one of the following strategies:
- Don't put all your eggs in one basket. In other words, diversify.
- Put all your eggs in one basket, but keep a close eye on it.
- Combine both of these strategies by making tactical bets on a core passive portfolio.
Most successful investors start with diversified, low-risk portfolios and gradually learn by doing. As investors gain more knowledge over time, they become more prepared to take a more active position in their portfolios.
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6. Be in it for the long haul.
Sticking to an optimal long-term strategy may not be the most exciting investment choice. However, your chances of success should increase if you stay the course and don't let your emotions or “false friends” get the better of you.
7. Be willing to learn
The market is difficult to predict, but one thing is certain: it will be volatile. Learning to become a successful investor is a gradual process, and the investment journey is usually a long one. Sometimes the market proves you wrong. Admit it and learn from your mistakes.
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