Successful Investors Do These Three Things

Last week, we looked at three behaviors that successful investors avoid:

• Trying to pick the right stocks,

• Trying to time to market,

• Choosing a mutual fund manager based on his/her track record

This week, we will look at three things successful investors do. They:

• Diversify

• Own equities

• Rebalance

Instead of trying to pick and choose the right stocks to buy, successful investors diversify as broadly as possible. The proverb “don’t put all your eggs in one basket” immediately comes to mind. Instead of owning a few large companies like Apple, GM, and Wal-Mart, successful investors buy all of the large companies.

Successful investors learn from academic research which segments of the market actually help them get the best possible return with the least amount of risk and then buy all of the stocks or bonds in each of those segments.

Second, instead of trying to time the market, successful investors know that “time in the market” is better than “timing the market.” Successful investors stay invested when the market goes up as well as when it goes down. They recognize that the up markets bring the returns and the down markets bring the opportunities to buy low.

They welcome the market fluctuations because they know that this is where wealth is created.

Lastly, instead of trying to find a mutual fund manager who can navigate the markets, they understand that no one can predict the market. Since no one can see the future, they know that setting up a broadly diversified portfolio that is customized for their own risk tolerance is best.

Successful investors know that markets fluctuate and are excited when the market moves (see above). To make the most of these fluctuations, they know they have to rebalance.

What does this mean?

The successful investor decides how much risk he is willing to take and then builds his portfolio accordingly. However, over time, the ratio of stocks to bonds changes with market fluctuations. Rebalancing is a way to get the portfolio back on target by selling what is high and buying what is low relative to the portfolio.

For example, let’s pretend you had 60% of your money in stocks and 40% in bonds. In 2008, as stocks values fell, the portfolio may have looked more like 45% stocks and 65% bonds. The portfolio is now off its target, so the successful investor would sell enough bonds to buy stocks until the target of 60% stocks and 40% bonds is back on track.

In this example, the successful investor sold bonds while they were high and bought stocks when they were low, thus following one of the rules of investing. Most people fail to do this and do the opposite. They see their stocks fall and instead of buying more, they sell and go to cash to “stop the bleeding.” They lock in their losses instead of buying more opportunity.

Successful investors automate this process so they don’t have to worry about it and know that their portfolio is one they can live with their whole life and that it will stay on course for the long haul.

If you would like your portfolio analyzed to see if you are diversified and/or have the right amount of risk for your personal preference, let’s set up a time to talk.