The Profile of a Successful Investor - as published in InsideNova.com
In two recent articles, I explained how attempting to predict the near-term future is not investing. It’s speculating. So then, what is investing? Successful investing requires a combination of science and determination. The science is the easier part, so let’s first explore your best investment behavior.
The fact is, we’re often our own worst investment enemy, because we’re inherently hardwired to be bad at it. Numerous studies suggest that most investors’ portfolios ultimately underperform the investments they hold by around 1–3%.
How is it possible to own an investment that earns “X percent,” but only receive “X minus 2%”? It’s because we fail to hold the investment through good times and bad, so all available returns are captured … including the ones that often come as a surprise. This happens if we ignore the evidence that markets have had many unpredictable peaks and valleys, but have ultimately trended upward over time.
Neuroscience has identified a number of biases in our brains that feed our irrational investment behaviors. To name a few, there’s overconfidence; hindsight bias; loss aversion; buyer’s regret; mental accounting; and, my favorite, the hot-hand fallacy, which causes investors to chase last year’s winners, believing that a manager’s skill is inferred from what is far more likely random chance.
To quote President John F. Kennedy, “Our problems are manmade—therefore, they can be solved by man.” (Or by women, I might add.) Here are a few ways to invest with determination:
- Establish a rational strategy and stick with it, especially when you’re tempted to lose your discipline
- Have faith that markets will ultimately climb upward over the long-term; they always have to date.
- Save and invest consistently, through good times and bad.
- Be patient! As Warren Buffett has written, “[S]ome things just take time: You can’t produce a baby in one month by getting nine women pregnant.” Ignore tempting shortcuts; let the markets develop your wealth for you over time.
Speaking of time, next time I’ll shift to the science of investing.