7 Habits of A Highly Effective Investors (For Beginners)
Updated: Apr 25, 2020
To say that the stock market has been turbulent lately would be a massive understatement. There have been several days where the stock market has triggered the "circuit breakers," which automatically halt trading for 15 minutes when the S&P 500 drops by 7% in a single day. And swings of 1,000 points in the Dow Jones Industrial Average in either direction are becoming quite commonplace.
However, crashes like this are an occasional but normal part of investing. Warren Buffett has an excellent track record of not only navigating market crashes well but also emerging from them even stronger than he went in.
With that in mind, here are the 7 Habits of Highly Effective Investors that could help you decide what to do -- and what not to do -- during these volatile times.
1. Start Early
Albert Einstein once said that compound interest is the eighth wonder of the world.
Compound interest is simply the interest that accumulates on your initial capital and the accrued interest thereafter.
Compound interest allows a principal amount to grow at a quicker rate than simple interest.
Thus there is the benefit of compounding our money early over the long-term.
Say there are two people, A and B.
A starts investing at the age of 19. He invests $2,000 every year from age 19 until 25 and stops thereafter. That means his total investment is $14,000.
On the other hand, B starts investing only at the age of 26. From age 26 until 65, he invests $2,000 annually. By the time he turns 65, he has contributed $80,000 to his investment portfolio.
Assuming both A and B can generate 10% yearly on their investment portfolios, whose portfolio would be larger at age 65?
Most would think that B would have a bigger portfolio. Yes, B indeed has a larger portfolio at $973,704 while A’s portfolio would be worth $944,641.
Now, here’s the interesting part.
A wins overall as he has a higher profit of $930,641 versus B’s $893,704. Remember that A had only put in $14,000 over seven years, whereas B contributed $80,000 over 40 years.
The best time to start investing is yesterday.
The next best time is now.
2. Set Aside for Safety Net
Emergencies can come unannounced. Just like the COVID19 and the Circuit Breaker measures, it has caught many people off guard.
To be a successful investor, you must always be financially prepared for unforeseen emergencies.
You can read more about Safety Net and how you can allocate your resources over here:
3. Live Below Your Means
Simply put, this means spending less than you earn. In fact it would be best to have enough discipline to spend significantly less than we earn.
If successful investors would have spent every dollar they earned, they wouldn’t have the money to set aside for longer-term financial goals.
To be a successful investor, you must spend less than you earn on an on-going basis. Spending too much will more than likely make one accumulate debt, instead of wealth.
A lot of us are tied down with subscriptions that might actually be meaningless. Lots of Singaporeans, for example, are subscribed to expensive gym memberships and entertainment subscriptions such as Netflix or Amazon Prime. Entertainment is definitely an integral aspect of our lives now because of the Circuit Breaker measures, but are these subscriptions absolutely necessary? It all boils down to what you think is a comfortable amount to spend, keeping in mind how much you earn.
For those of you who didn’t already know, Singtel CAST is free for all Singaporeans (till 30 June 2020). Check it out here: https://cast.singtel.com/
4. Invest Automatically and Regularly
Life can easily get to the best of your good intentions of investing. Thus, a good habit is to automate your investments. The best way to automate your investments is to open an Investment Account for auto-debit from your savings bank account for a fixed amount, on a fixed date every month.
Successful investors invest regularly. The best approach is via a Systematic investment plan (SIP), wherein you can invest a fixed sum regularly regardless of the market conditions. In fact, SIP enforces the discipline to invest each month, hence ensuring that you invest regularly and not try to time the market. Little by little, you will be able to generate wealth, over time.
5. Invest in What You Know and What You Like
One of the easiest ways to make an avoidable mistake is getting involved in investments that are overly complex.
Many of us have spent our entire careers working in no more than a handful of different industries.
We probably have a reasonably strong grasp on how these particular markets work and who the best companies are in the space.
However, the far majority of publicly-traded companies participate in industries we have little to no direct experience in.
“Never invest in a business you cannot understand.” – Warren Buffett
This doesn’t mean we can’t invest capital in these areas of the market, but we should approach with caution.
6. Invest for Long Term
Once a high-quality business has been purchased at a reasonable price, how long should it be held?
“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.” – Warren Buffett
Warren Buffett clearly embraces a buy-and-hold mentality. He has held some of his positions for a number of decades.
Why? For one thing, it’s hard to find excellent businesses that continue to have a bright long-term future.
Furthermore, quality businesses earn high returns and increase in value over time. Time is the friend of quality businesses. Fundamentals can take years to impact a stock’s price, and only patient investors are rewarded.
Finally, trading activity is the enemy of investment returns. Constantly buying and selling stocks eats away at returns in the form of taxes and trading commissions. Instead, we are generally better off to “buy right and sit tight.”
7. Know Your Goals and Objectives
Market movements can be erratic and volatile. Stay focused on your goal and avoid making rash decisions.
Go back to your goals and objectives. For what purpose do you want to invest? Is it for capital growth or to have dividends every year?
Different investors have different goals and objectives, and thus they will have different strategies moving forward.
The world of investing may be complicated initially. Fret not. We are here to guide you in your investment journey.
Come and book an appointment and speak to us today.
This article was also featured here.