Practice makes us all better. Vince Lombardi once said, “Practice does not make perfect. Only perfect practice makes perfect.” Do you need to strive for perfection to become a better investor? Of course not! In fact, striving for investment perfection may leave you feeling down and depressed. Rather than trying for perfection aim for small victories to improve your lot.
Here are a few ideas to help you become a better investor.
- Plan. Investors who complete a financial plan have three times more assets when compared to those individuals who don’t do any planning?[1] A financial plan will help guide you towards your financial goals and keep you grounded when the stock market goes haywire.
- Budget. A strong budget will improve your investment results. If you can get a handle on your spending habits, then you can start to improve your financial picture. The best way to budget is to comb through your previous bank and credit card statements. Your review will identify the good, bad and ugly of your spending habits. Mint.com is a great resource to help you with your budgeting.
- Save. Saving your own money is paramount to long-term financial success. How much should you save? I’d recommend 10% of your gross income to start. If you earn $10,000 per month, then try and save $1,000 per month. If you can’t save 10%, then save what you can because something is better than nothing.
- Automate. Establish an automatic deduction from your checking to your savings account or investment account. By automating your savings you’re more likely to stay committed to your investment program thus giving you an opportunity to increase your long-term wealth.
- Look to the Horizon. Knowing your investment timeframe will improve your results. If your time horizon is 1 to 3 years, investment in safe, short-term investments like CD’s or T-Bills. If your time horizon is 3 to 10 years, buy bonds and stocks. A time horizon of 10 years or more calls for a large allocation to common stocks.
- Participate. If your company offers a 401(k) plan or similar program, sign up as soon as possible. Again, the recommended savings amount is 10%, however, if you can’t contribute this amount then find out what the company match is and start with the match percentage. For example, if your company matches 4%, you should contribute 4%.
- Buy Stocks. Stocks outperform bonds. The 90-year average annual return for common stocks has been 10% while long-term government bonds returned 5.6%. A one-dollar investment in large company stocks is now worth $5,386 while a dollar invested in bonds is worth $132.[2] A heavy dose of common stocks will give you the best opportunity to create generational wealth.
- Buy Small Stocks. Small company stocks outperform large company stocks. The Dimensional U.S. Small Cap Value Index averaged 13.3% from 1928 to 2015. A one-dollar investment is now worth $58,263. The Dimensional Large Cap Value Index averaged 11.1%. A dollar investment in the large cap index is now worth $10,414.[3]
- Buy Index Funds. Passive index investing is better than active stock picking. The Standard & Poor’s study of passive v. active reveals that over 15-year period 95% of active fund managers fail to outperform their benchmark. This is also the case for 1, 3, 5 and 10 years.[4]
- Diversify. Diversification is safer than concentration. A diversified portfolio of large, small and international companies allows you to own stocks from around the globe. Adding bonds and cash to your portfolio will reduce your risk. Moving to a 60% stock and 40% bond portfolio from an all stock portfolio reduces your risk by 24%. Allocating your assets across sectors, investment types, and continents can increase your odds of investment success.
- Practice Patience. It takes time to create generational wealth. Don’t worry about the daily moves in the stock market and don’t try to trade your way to financial freedom. A solid buy and hold strategy is the best way for you to make money. In fact, missing a few of the best days in the stock market can derail your investment program. A study by J.P. Morgan found investors who missed the 30 best days in the stock market saw their investment return drop by 85%![5]
- Rebalance. Rebalancing your account will allow you to keep your risk level intact. For example, if you start the year with 60% stocks and 40% but end the year with 80% stock and 20% bonds you now have too much risk. An annual rebalancing of your account back to 60%/40% is the prudent way to manage risk. I’d recommend rebalancing your account in January to make sure you’ve received all your dividends, interest payments and capital gains.
- Lower Your Fees. Lower fees are better than higher fees. The less you pay in fees the higher your return. This is obvious but needs to be stated. Less is more. If you’re not sure what fees you’re paying, ask. You can also look up your mutual fund fees on sites like Morningstar or Yahoo! Finance.
- Get Help. Working with an investment advisor can help you increase returns. A study by Vanguard showed working with an advisor can add 3% in net returns.[6] An advisor will help you with financial planning, estate planning, investment planning, charitable planning, and much more. If you’re going to work with an advisor, make sure they’re a Certified Financial Planner™ or Chartered Financial Analysis.
With these suggestions, I’m confident you’ll become a better investor. A little practice and patience will take you a long way on your road to financial success.
The journey of a thousand miles begins with one step. ~ Lao Tzu
Bill Parrott is the President and CEO of Parrott Wealth Management, LLC. For more information on financial planning and investment management, please visit www.parrottwealth.com.
September 23, 2017
Note: Your investment results may differ than those posted in this blog. Past performance is not a guarantee of future results.
[1] http://www.nber.org/papers/w17078.pdf
[2] Dimensional Funds 2016 Matrix Book.
[3] Ibid.
[4] https://us.spindices.com/documents/spiva/spiva-us-year-end-2016.pdf
[5] http://www.businessinsider.com/cost-of-missing-10-best-days-in-sp-500-2015-3, Sam Ro, 3/12/2015