How to be a Successful Investor

3 Things SMART Investors do Differently

January 26th, 2012 by John Anderson – Be the first to comment
Posted in How to be a Successful Investor, Investing, Successful


How to be a Successful Investor - 3 Things Smart Investors do DifferentlySuccess can be an arbitrary term meaning different things to different people. However, all of us want to be considered successful.  Especially as an investor. For me, being successful is simply meeting your goals.  The take away form that is: you have to have goals!  More on that in a minute.

When it comes to our wealth and investing, we all invest for different reasons.  Those reasons might be saving for retirement, sending kids to college, or supporting our favorite charity. However most find that successful investing is elusive at best.  The research firm Dalbar performs an annual survey of investor returns over the preceding 20 year period and the results paint a dismal picture.

The survey shows that most investors fail to even come close to the returns generated by the market indexes themselves. For example, the most recent survey, covering 1990 to 2010, shows that the average investor earned an annualized return of just 3.83% while the S&P 500 returned 9.14% annualized for the same 20 year period.  That’s a lot of change left on the table.

Let me put this into perspective.  Say you invested $10,000 in 1990 and you are the average investor earning an annualized return of 3.83%.  By 2010, your account would be worth a whopping $21,205.  Now, lets say you are a smart investor and managed to get market like returns.  That same $10,000 investment has turned into $57,501.  That’s an incredible $36,296 of missed opportunity all because you didn’t follow successful investing rules!  That’s a lot of money and its worth taking a closer look at the rules that can generate it!

Through this series on How to be a Successful Investor I’ll be exploring the reasons most investors fail and the simple things you can do to succeed.  While there are many reasons most investors fail there are some easy things that you can do today that will make all the difference tomorrow. In investing, as with most things in life, there are a few simple things that the most successful do differently.

1. Set S.M.A.R.T. Goals

Successful people are objective and have realistic targets in mind before they begin. They know what they are trying to accomplish, why they are working for it, and how they are going to get there.  Likewise, successful investors must create and pursue realistic goals.  More specifically they set S.M.A.R.T. goals.

S.M.A.R.T. goals are Specific, Measurable, Attainable, Relevant, and Timely.

  • Specific: A general goal would be “I’m going to save for retirement.”  A more specific goal would be: “I’m going to save 10% of my income for retirement and invest it following the rules of successful investing.”  The more specific your goal, the better chance you have of actually doing it.  Being specific gives you measurable parameters and constraints.  The key is to have self-motivating goals.  If saving 10% or more for retirement doesn’t sound appealing, frame it in such a way that does.  For me, I love woodworking and I want to design and build custom hand-crafted furniture.  An example of a self-motivating goal would be “I’m going to save 10% of my income so that I can retire and enjoy designing and creating fine furniture.”  Give yourself a carrot and go for it!
  • Measurable: You must have a logical system in place to measure the progress of your goals.  To determine if your goal is measurable, ask yourself “How will I know when my goal is complete?”  It’s also important to break large long-term goals such as saving for retirement down to smaller milestones such as how much you will invest per year in your 401(k) versus your IRA per pay period.  With smaller milestone goals it’s easier to get a feeling of accomplishment, keeping you moving towards your ultimate goal.  Also keep goals to things over which you have reasonable control.  You can’t control what goes on in the economy or the markets, but you can control how you react to it!
  • Attainable: To be attainable, your goals must be something towards which you are both willing and able to work.  Your goals must be realistic.  If you are ready to retire, but didn’t do a good job of saving and following the rules of successful investing, then a goal of retiring and living off the income generated by your portfolio is probably not a realistic goal.
  • Relevant: Relevance stresses choosing the goals that matter.  Resources are limited and we all have to make choices.  When setting your goals, they should be relevant to you and your life.  The goal of sailing around the world with your spouse is not very relevant or realistic if you or your spouse terrified of the water…
  • Timely: Sound goals are framed in time so that there is a definitive end you are striving for.  Commitment to a time frame helps you to stay focused and encouraged.  A lack of a time framed reference can cause a lot of needless distress.  For example, if you are saving for a retirement that is 20 years in the future, fluctuations in your portfolio value today are not as important as they are the day before you retire!

2. Take Action

“Action is the key to all success.”  If you stop and think about this quote, you can’t help but agree with it’s blatant truth.  No one ever achieved anything by sitting still — other than sitting still I guess.  The same is true for your investing goals.  It is one thing to come up with a list of goals, even a good and actionable plan.  It’s quite another to put that plan into action.  Sometimes, we have big dreams and plans but wonder why they never seem to come to fruition.  We may look around us and see others having the success we desire and we wonder what the missing ingrediant is.  More often than not that ingrediant is action. “A body in motion tends to stay in motion.”  It can be hard to put your plan into action.  It often means change, and change is hard.  When investing it might mean slightly changing your spending habits in order to save.  It may mean getting your finances under control and not living your life on a credit card.  It might simply mean sitting down with your wealth advisor and coming up with a plan to begin with….

3. Invest by the Numbers

John D. Rockefeller is one of the most successful businessman and investors of all time.  One of the main reasons he was so successful is that he did things by the numbers.  He knew were every penny, and I mean penny, of Standard Oil was going.  When he had a decision to make, he always did what the numbers told him.  He didn’t rely on his gut or let his emotions get the better of him.  As investors, we can learn a lot from this approach.  When the markets are giving crazy roller coaster rides like they are now, we are prone to act on emotion.  There is a lot of research pointing to our behavior having a huge impact on our ultimate investing success.  If we take our emotions out of it and let the numbers do the talking, we stand a much better chance of finding success.

By taking a few simple steps you can put yourself on the right path for investing success.  It isn’t difficult, but there is a bit of a formula involved.  Working with a trusted wealth adviser will help you put together a reasonable plan and act on it. Investing by the numbers is perhaps one of the most important things your wealth advisor will help you with.  That means everything from  helping you put together the right mix of investments to helping you stay focused on the big picture when it seems like the sky is falling.  The best advisors  are focues on you and your success.  They help you become and elite investor by avoiding the mistakes of the average.


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Standard Disclosure:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Investing involves risk including loss of principal.