20/07/2020

Eight behavioural skills of successful investors you should follow

The Economic Times

It is not just financial literacy but also behavioural skills that are common to investors who grow their wealth consistently. Here are some habits to emulate.

  • They have an investment strategy
Most successful investors have a well-crafted investment strategy that comes from thorough research or experience, and they stick to it. Be it a focused approach, diversification and asset allocation, or goal-based investing, they follow it without being bothered by market noise and random advice from various sources.

What it translates to
Sticking to a strategy translates to investing discipline and long-term gains. Whether you have diversified into various assets and rebalance the portfolio periodically, or are focused like Warren Buffett, you are likely to earn higher returns and meet your goals compared with those who don’t have a defined strategy.

  • Emotional discipline
Largely underplayed, this is key to most investing mistakes. Lack of emotional discipline means giving in to fear, doubt, attachment, overconfidence or greed, all of which translate to impulsive decision-making. This can make you stray from your investing strategy, and can often be the difference between affluence and poverty.

What it translates to
Not selling an asset that is a loss-making investment, or investing in spurts in random instruments. Selling stocks or redeeming mutual fund units when the market falls, or buying when the Sensex is bullish. All result in losses.
 

  • They don’t stop learning
Successful investors also read voraciously and update themselves on financial information and events. They are aware of macro and micro developments, be it domestic or global, performance of companies and sectors, and regulatory changes in taxation, insurance, etc. They are also good at processing and analysing information to see how it affects their investments.

What it translates to
They are always one step ahead of other investors and seldom repeat their mistakes or lose money due to ignorance. Applying information to their investments gives them perspective and foresight to protect their money.

  • They protect their wealth
Successful investors not only know how to create wealth, but also how to protect it. They cover all risks and make sure that their wealth is not eroded by inflation, market risks, ill-health or death. They also ensure that it is passed on securely to their heirs.

What it translates to
This means they are prepared for all emergencies and have exit strategies, contingency corpus, adequate health and life insurance, as well as a will. They plan their investments with care so that goals are met and money is not lost on account of a mistake in calculation.

  • Don’t follow the herd
Since such investors conduct their own research and can draw inferences, they seldom follow the herd and mostly lead from the front. They buy an asset or a stock because their portfolio demands it or because their research claims it’s a good time to buy, not because everyone is doing so.

What it translates to
Since their investments are governed by reason and logic, they seldom fall foul of trends or lose money because of a wrong purchase. More importantly, they know the purpose and value of each asset in their portfolio.

  • They think long term
Such investors keep the big picture in mind and are not disturbed by short-term developments. They do not want to get rich overnight or make it big by getting the market timing right. Whether it is achieving goals or building wealth, they invest for the long term.

What it translates to
Since they are focused on their long-term goals, they are seldom distracted by short-term market noise or volatility. So they don’t take impulsive investing decisions or suffer losses.

  • They do not have inertia
Most successful investors are proactive and never procrastinate. They extract the most out of their money because they understand the time value and cost opportunity of not investing. Whether it’s starting mutual fund SIPs, buying insurance or filing tax returns, they do it on time.

What it translates to
They don’t let their money idle in bank and start investing for their goals at the right time. This means they are most likely to achieve their goals. They also never lose money in fines and penalties due to delayed payments of bills or EMIs, or accrue interest due to unpaid credit card bills.

  • They are frugal
Contrary to what most people believe, most successful and affluent investors are very careful about spending money. Not only are they frugal in their lifestyles, but also cautious about losing money. This means not being extravagant when it comes to cars, houses or food, using discounts where possible, and reducing discretionary expenses.

What it translates to
Lesser wasteful expenditure means more savings and higher investments. Since a frugal person is keen on saving money, he invests carefully so as to optimise his returns and minimise losses.