Tuesday, December 9, 2008

5 Successful Traits of a "Successful" Investor

Notice I did not say trader. There is a difference between trading and investing and it is important to distinguish between the two. The problem is that these days the people who actively trade their portfolios are very vocal about the death of buy and hold and I believe are starting to win people over and fleece them into thinking that trading is the answer. Just listen to a podcast by Andrew Horowitz, and you will hear him go on and on about how wonderful he is because his trading style is working in THIS market and how wrong all the buy and holders were. This is based on 6-months of a very bad market. However 6-months does not a market make!


That is why in this post I have summarised the thinking I have done to get back to basics and remind myself of what really makes a successful investor. Here, in my mind, are the top 5 investor traits that will make an investor successful in all markets:

1. A Successful Investor will Focus on Asset Allocation Above Everything Else

Asset allocation has the largest input to return in an investor's portfolio and the "good" investor ensures that his/her portfolio is structured with a disciplined and diversified asset allocation. Research obtained from The Only Three Questions That Count shows that asset allocation makes up approximately 70% of a portfolio's return.

2. A Successful Investor will Have the Right Risk Profile for Them

I think the biggest problem for people in the past 6-months to a year of this market is that they did not REALLY understand their risk profile. This market caught millions of people off guard and the impact a down market can have. For example, there are numerous stories of seniors who have been all in equities losing 60% or 70% of their portfolio. Markets will always go down over short periods of time and if you have found yourself unable to stomach, or worse financially deal with, the volatility in your current portfolio then you are not as risk adverse as you thought. Successful investors know their emotional reactions to problems and structure their portfolio in a manner that minimizes the likelihood a emotional reaction will occur. The easy thing to do is be more conservative than you think.

3. A Successful Investor Always Has a Plan

Having a plan is all about goal setting and knowing where you want end up. The reason this is important is simply because a plan minimizes the likelihood that an investor will make unstructured and emotional decision. Of course this requires a good plan, which can be obtained by reading books such as Live It Up Without Outliving Your Money and the dividend classic The Single Best Investment.

4. A Successful Investor Buys When Others are Selling

Warren Buffett has said that you investors always pay a premium for a cheery consensus - such as when markets are constantly rising. However, when markets are crashing I believe that many investors will come out ahead over the long term through buying quality assets now that are priced at a discount. This can mean buying a big basket of individual dividend stocks or an index fund. It really does mean buy low and sell high. Even if we don't know what low really means, an disciplined investment strategy of buying consistently should come out ahead.

5. A Successful Investor Has a Long Term Focus

As I said, the anti-buy and holders are having a field day right now because in this market buy and holding has been a painful thing. However, most of the people I hear talking are looking at the market from a day-to-day perspective and not the long term game it is. Successful investors think long-term, and in my mind that is at least 10 years. 20 is even better. They key is ensuring your portfolio has the right allocation, is structured based on your true risk profile, is implemented according to a proven plan, and consistently buys good assets over time. This is where I spend my energy.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.

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