Becoming a more successful investor, unless you’re counting on luck to pull you through, involves becoming a smarter investor. Of course, there’s no best answer or even best way to become successful at investing. There are things you can do and know that can help.
Set Goals First
It sounds simple and perhaps even a waste of time. It is neither. Think about your goals. What do you hope to achieve as an investor? Your goals will let you know some very important things that will instruct your moves now and in the future. Goals, for example, help you decide how to allocate your assets. They also provide a timeline for when you want to reach those goals. Finally, goals help you decide your tolerance for risk.
Just because you set goals doesn’t mean they are cast in stone. Your goals will likely change over time. Those changes will alter your time horizon, asset allocation and tolerance for risk. Even when goals don’t change, reassessment is necessary to make sure you are on track with the 3 main components – time, asset allocation and risk tolerance.
Risk Tolerance Versus Risk Capacity
Risk tolerance is the amount of market volatility you can handle without freaking out. If your tolerance is high, you are OK with big swings in your portfolio and willing to ride out the downturns. Low risk tolerance, of course, is the opposite. You accept lower returns in exchange for not much of a roller-coaster ride. Risk capacity is different. It is the amount of risk you can take based on the amount you should take to meet your goals. It is literally a matter of matching the amount of risk you take to the goals you have set.
It’s not enough to diversify the holdings within your portfolio. You must diversity the types of accounts in which your portfolios reside. You may be investing in a 401(k) or Traditional IRA – or both. Good. However, these types of retirement accounts limit when you can access (withdraw) funds. You could add a Roth IRA or other type of investment account that lets you get at funds when you need them.
Related: LET THE CHIPS FALL
Make No Mistake
The reason most investors underperform the S&P 500 is because they make mistakes, usually driven by emotion. The S&P 500 just tracks the market. To be a better investor, do all you can to remove emotion. Set a strategy based on your goals. Automate anything you can from the timing and amount of your investments to rebalancing your portfolio. Finally, seek and accept expert advice, especially as it relates to following your strategy.