With the power of compounding and potential for returns, investing can be a great way to grow your wealth over time. It is a part of your overall financial wellness plan—a way to help ensure your needs are met and goals are achieved. However, with so much uncertainty in the world—and economy, investing can be risky, and can prompt the question: can anyone be successful at investing? In this article, we will explore some key skills, strategies, and attitudes necessary to becoming a good investor, and highlight several steps to get there.

1. Understand the Basics of Investing—and Keep Learning

Investing is the process of putting your money into assets that have the potential to grow in value over time; like stocks, bonds, mutual funds, or real estate. The goal of investing is to generate returns on your initial investment and grow your overall investment over time. This can be achieved through the appreciation of the asset’s value or through the income generated by it, such as dividends or rental income.

Investing can be a powerful tool for building long-term wealth, but it does come with risks. The value of your investments can fluctuate based on market conditions, and there is always the possibility of losing some or all of your money. To become a skilled investor, you must understand the fundamentals of investing. This includes having a basic understanding of the different types of asset classes, such as stocks, bonds, mutual funds, and ETFs, as well as knowing the associated risks and rewards. For example, do you know the difference between index funds and mutual funds? What are cyclical and defensive stocks? In addition to being knowledgeable about all the different investment vehicles, it is also important to understand different investment strategies, such as asset allocation, diversification, and dollar-cost averaging. It is equally important to understand how taxes affect your investments, like tax-advantaged investments to consider for your portfolio and how capital gains work.

To learn the basics about financial concepts and investment topics, read books or articles, take classes, or listen to podcasts from reputable sources. These can be a free or low-cost way to build your knowledge and stay on top of new strategies, and trends.

2. Develop an Investment Plan

Developing a comprehensive financial plan is essential to becoming a savvy investor. This plan should include setting financial goals, determining your risk tolerance, and determining the best asset allocation for your investment. The plan should also include strategies for diversifying your portfolio, such as utilizing different investment vehicles and allocating funds across various asset classes. Your plan should include a timeline for when to invest and when to rebalance your portfolio.

According to Bankrate, the following investment strategies can potentially be a good fit for a beginner:

1. Buy and hold strategy – a long-term investing approach where an investor purchases stocks or other securities and holds them for a long period of time, regardless of market conditions. This strategy assumes that the market will eventually recover, and the investor will benefit from the eventual increase in the asset’s prices. The strategy also assumes that the investor will benefit from the inherent advantages of being a long-term investor, such as reduced transaction costs, a lower tax burden, and the potential for increased dividends over time.
2. Buy index funds –index funds are a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the S&P 500. An index mutual fund generally provides broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index no matter the state of the markets. Index funds are passively managed, which means they are not actively managed by a portfolio manager.
3. Income investing – a type of investing strategy that focuses on generating income from investments. This often involves investing in securities such as stocks, bonds, and other fixed-income instruments that offer regular income in the form of dividends, interest, or other payments. Income investors often focus on generating a steady stream of income from their investments, rather than aiming for capital appreciation.
4. Dollar-cost averaging – an investing strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. Per FINRA, “Dollar-cost averaging can help take the emotion out of investing. It compels you to continue investing the same (or roughly the same) amount regardless of the market’s fluctuations, potentially helping you avoid the temptation to time the market.”

3. Stick to Your Plan

For successful investing, patience and discipline are key qualities to apply to your mindset. Markets are unpredictable; they go up and down and this is normal…and necessary. Also, returns are not guaranteed. When the stock market drops, some people run for the hills, selling off their stocks at a loss based on their emotional gut reaction to losing money. Anxiety is a normal response to volatility; so, if you have a hard time tolerating the ups and downs of the market and your portfolio, it may be a good time to re-evaluate your risk tolerance. Your portfolio allocation may be misaligned with your risk tolerance level, and a reallocation to less risky investments might be necessary to give you more peace of mind.

However, staying invested, even during market volatility, may be the best course of action over the long haul. According to Fidelity, “The financial crisis of late 2008 and early 2009 when stocks dropped nearly 50% might have seemed a good time to run for safety in cash. But a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during that time were far better off than those who headed for the sidelines. In the decade following the start of the crisis in June 2008, those who stayed invested saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%. This is twice the average 74% return for those who fled stocks during the fourth quarter of 2008 or first quarter of 2009. While most investors did not make any changes during the market downturn, those who did made a fateful decision with a lasting impact. More than 25% of those who sold out of stocks never got back into the market and missed the gains that followed.”

Patience may be one of the most important qualities to becoming a good investor. Building wealth usually often takes time, and a long-term view is important when it comes to investing. Successful investors usually do not get caught up in short-term market fluctuations or panic when things do not go as planned. Instead, they stick to their well-thought-out investment plan, even when the markets are volatile. They understand that investing is a marathon, not a sprint, and are willing to weather the ups and downs of the market to achieve their long-term goals.

Discipline is another critical quality we see in successful investors – they have a plan and stick to it, even when it is difficult. They tend to make decisions based on logic, not emotions. For example, they do not let fear drive their investment decisions. Instead, they use a systematic approach and make decisions based on their investment plan and the data available to them.

4. Monitor and Evaluate Your Investments

When it comes to investing, “set it and forget” may not be the best approach. After all, the world is constantly changing. Threats of a war, a pandemic, or policy change can alter your investments’ trajectory. To ensure that your investments are on the right track, you must monitor them but keep in mind that checking daily can sometimes cause strife and anxiety, so figure out the right cadence for you.

The simplest way to monitor your investments is to read your account statements. Per FINRA, “Your monthly or quarterly statement will generally tell you the current market value of your investments as of the closing date, the change in value since the last statement, and the year-to-date change. You will also see a record of your transactions for the previous period, including purchases and sales, and information on dividends, bond income, and mutual fund distributions, as well as realized and unrealized capital gains and losses.”

Also, evaluate how your investments measure up to others. According to FINRA, “if you want to know how an investment is performing you look at the benchmark that tracks investments that are most like it.” This is assuming you are invested in securities such as stocks, ETFs, mutual funds, bonds, and so forth. Depending on what asset class you are invested in, you can use benchmarks such as Dow Jones Industrial Average, S&P 500 Index, Russell 2000, and Barclays Capital Aggregate Bond Index to assess how your investments are doing.

5. Seek Professional Advice

Investing can be complex, and it is important to understand the risks and rewards associated with each decision that you may make. It is also equally important to understand the different types of investments, the different strategies used to invest, and tax implications. For this reason, it may be beneficial to seek advice from a financial advisor or an investment manager. A financial professional can help educate you on the finer details of each investment and offer an opinion regarding your financial situation that is not driven by emotions.

Takeaway

Investing can be a way to grow your wealth over time, but it is important to remember that it can be risky, and returns are not guaranteed. By understanding the basics of investing, developing an investment plan, and sticking to it, monitoring your investments, and seeking professional advice, when necessary, everyone has the potential to become a good investor.

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Standard Disclosure

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated. The information contained within is believed to be from reliable sources. However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.

Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.

Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30th Street, 2nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

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References

Fidelity. (April 27, 2022). 6 habits of successful investors. https://www.fidelity.com/viewpoints/investing-ideas/six-habits-successful-investors

FINRA. (May 24, 2022). The Pros and Cons of Dollar-Cost-Averaging. https://www.finra.org/investors/insights/dollar-cost-averaging

FINRA. (n.a). Tracking Performance of Your Investments https://www.finra.org/investors/learn-to-invest/key-investing-concepts/tracking-your-investments

Royal, James. (January 24, 2023). 5 popular investment strategies for beginners. Bankrate. https://www.bankrate.com/investing/investment-strategies-for-beginners/