A variety of behavioral traits can affect investment decision-making for the worse. For example, do you make investment decisions based on emotion, in haste or in reaction to trending news? If so, your behaviors may potentially sabotage the portfolio you’ve spent years trying to build. The good news is that learning new habits may help you successfully build, preserve and transfer wealth. Here are some tips and suggestions to develop good investing habits.
1. Think of long term as 20 to 30 years out.
We believe it is important to remember one of the fundamental concepts of investing: “staying the course.” This means remaining invested through difficult market environments. It’s nearly impossible for anyone to successfully time the market with any degree of accuracy for any length of time.
A key step is to work with an advisor to establish a long-term investing plan. Once your plan is in place, ignore the warnings of others—like the media and financial press. Stick to your plan, focus on the long term and heed the advice of investing professionals.
2. Live below your means.
According to a 2013 Workonomix survey, the average American worker spends $2,000 per year eating lunch out instead of brown-bagging from home. If you spend that much, and your money were instead invested for retirement, you could increase your total retirement savings by more than $200,000, depending on your savings rate, the return rate on your investment and your time horizon. What a difference a year of spending discipline could make!
Keep in mind that unnecessary purchases will only deplete savings. Establish a monthly budget to help you rethink current spending habits, identify opportunities to save and get closer to your retirement goals.
3. Invest based on goals.
The cardinal rule of investing is to “buy low and sell high.” However, investors historically have increased their allocations to stocks during favorable market cycles and decreased their allocations to stocks near the bottom of down markets. As you may guess, movements in and out of the market are counterproductive for pursuing long-term goals because investors end up buying when prices are high and selling when prices are low.
Avoid taking unnecessary risks and losses by sticking with a goal-driven investment plan. Don’t let short-term market fluctuations influence decisions about your portfolio.
4. Be an independent thinker.
Even savvy investors can be drawn in by the lure of a raging bull market or cowed into submission by plunging stock market returns. The urge to chase good performance and run from weak performance is strong, but it’s important to maintain a long-term mindset—even when it runs counter to popular opinion.
Avoid changing investing behaviors to follow the herd—even if it feels like you’re sitting on the sidelines and missing out on gains. Pave your own path, and maintain a portfolio balanced between stocks and bonds to help cushion market peaks and valleys.
5. Take calculated risk.
Experienced investors know that risk is an inescapable part of investing. Still, severe market downturns can challenge anyone’s willingness to take on too much risk. During these downturns, you may be tempted to severely limit your risk exposure.
A sensible approach is to draw upon a variety of investments that will bring a diverse risk and potential reward mix to your portfolio. Meet regularly with your financial advisor for help with maintaining the proper risk/reward balance to pursue your long-term goals.
6. Pay yourself first.
Market declines, corrections and downturns can be disheartening. They can also be opportunities for investors with workplace retirement plan accounts, IRAs or any long-term investment programs that use dollar-cost averaging. Dollar-cost averaging is a method of investing a fixed amount of money at regular intervals. It works the same for everyone, regardless of investment experience.
Establish a consistent savings schedule early on to take advantage of compound growth, and view your investments as an expense that needs to be paid. During down markets, your fixed investment will allow you to take advantage of distressed prices and buy more shares.These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from an advisor.