How can some people get rich off the stock market while others flounder or even just get lucky for a while before losing most or all of what they invested? According to superstar investor Warren Buffet, “Success in investing doesn’t correlate with IQ … what you need is the temperament to control the urges that get other people into trouble in investing.”
Successful investors have the self-control to stick to a long-term investment strategy, no matter what the market does or how other investors are reacting to it. They make financial decisions based on cool logic, rather than emotional responses.
Of course, that’s easier said than done. Most investors know that their emotional responses can quickly derail even a successful investment train, and even the wealthiest, most savvy investors are capable of making mistakes when they make decisions based on their emotions. Luckily, there are steps you can take to increase your chances of success in investing, even if you’re not the calmest, most levelheaded and logical person in the world.
Remember the Big Picture.
Of course, everyone has both short and long-term financial goals, but when it comes to investing in stocks, you need to remember you’re making these investments for the long haul. You should think about investing for a minimum of five years. Gather information about your potential investments and choose strong, solid companies you know will offer you returns over the long run. Don’t try to speculate or time the market.
Ignore the Market.
That’s right — if you’re prone to making snap decisions to buy or sell stock based on day-to-day market fluctuations instead of according to a long-term plan made for solid financial reasons, then turn off the television, shut down the computer and stop watching stock prices like a hawk. Day-to-day fluctuations in stock price don’t mean much over the long haul — which is what you’re in it for, remember —and only serve to encourage you to make rash financial decisions.
In order to succeed as an investor, you need to minimize trading frequency and have the self-control to hold on to your stock when the market experiences a downturn. When stock prices drop and you start selling due to panic, you lose money; if you’ve chosen a solid business, after all, and those stock prices will eventually climb again. When you trade too often, you’re more likely to make investment mistakes and you pay more in brokerage fees. A 2011 Barclays Wealth survey found remembering the big picture, holding on to stock and minimizing trades translated to more financial satisfaction for investors.
Diversification gives your portfolio some protection from the whims of the stock market. Invest in mutual funds to add stability to your portfolio. When your portfolio is truly diversified, you’ll find that you lose money on some investments while gaining on others — this spreads out your risk so you’re less likely to suffer substantial overall losses.
You can also keep some of your assets in illiquid investments, like real estate or gold investments. These assets are difficult to offload when you’re feeling panicky, so you’re more likely to hold on to them. You should also keep about a third of your assets in the form of cash, so you don’t have to sell stocks when an emergency comes up.
Establish Investment Rules.
The best investors avoid letting their emotions make their investment decisions by establishing rules they adhere to religiously in investing. Financial deadlines, for example, can help you adhere to savings and investment goals. You may choose to invest a set amount of each paycheck. You can promise yourself you will only spend out of income and never out of capital. You can dictate a cooling-off period to think over any investment impulses before you act on them.
Delegate to an Advisor.
If you find you really just don’t have the right temperament to manage your own investment portfolio, you can give this task to a financial advisor. Having an advisor make your financial decisions takes the pressure off of you and gives you the added benefit of your advisor’s professional expertise. Even if you don’t put the management of your portfolio entirely in the hands of your advisor, you can meet with him or her regularly to review your financial goals and make plans.
It takes a certain kind of person to be successful on the stock market. You need to stay cool and levelheaded in order to adhere to your investment plan without making rash decisions. If you, like many investors, can’t put your emotions aside when it comes to your financial decisions, that’s okay — that’s what financial advisors are for.