An article in Fidelity Viewpoints posits that investing isn’t about striking it rich or playing the market game, but rather about finding financial health; being able to meet your needs and the needs of your dependents in addition to setting financial goals and achieving them. And there are 6 essential habits that successful investors share, which the article reveals to be:
- Make a plan: It’s important to create a plan to start with, and that plan doesn’t need to be elaborate or costly. Take stock of where you are so you can lay out the steps to get to your financial goals. Online tools can get you started, but using a professional financial planner may be a wise way to start off: some of Fidelity’s research has shown that those who work with a professional are more equipped to achieve their long-term financial goals.
- Stay the course, even if the market gets turbulent: It’s a natural reaction to want to sell if your investment goes down. But the most successful investors don’t; rather, they keep their allocation in stocks that they can stomach going up and down in good markets and bad. Indeed, a Fidelity study after the 2008 financial crisis found that workplace savers who kept their investments during that turbulent time wound up better off in the long run than those who ran for the hills. Investors that stayed grew their portfolios 147%, and more than 25% of investors who left the market during that time never returned, missing out on the huge gains that happened in the years after. Anxiety is a normal response to volatility, but if it gets to be too much, reorganize your portfolio with a less volatile balance of investments.
- Save, don’t spend: One thing that’s important to always keep top of mind is how much income you are socking away for the future. Building up your savings early and contributing to it often can be a driving force toward future financial goals. Fidelity believes putting away at least 15% of your income towards retirement is a good number to strive for.
- Diversify: Portfolio diversification is foundational to mitigating risk; by having a proper mix of investments, your portfolio should deliver growth potential along with the level of risk you’re comfortable with, which in turn will make it easier for you to stay invested even through the market’s ups and downs. Of course, a diversified portfolio still isn’t a guarantee against loss or for gains, but it can offer a reasonable exchange of risk and reward. Stocks should be diversified across sectors, regions, and size, and bonds could be diversified across varying credit qualities, maturities, and issuers.
- Lee-fee investment tools can offer good value: A study from Morningstar showed that “funds with lower expense ratios have historically had a higher probability of outperforming other funds in their category—in terms of relative total return, and future risk-adjusted return ratings.” Fees can affect your returns, so look for brokers and investing tools with lower fees.
- Taxes, taxes, taxes: It’s vital to keep an eye on taxes and know how much you are going to pay for the type of account you maintain. 401(k)s, IRAs, and some annuities offer tax benefits that can help produce higher after-tax returns. And while taxes shouldn’t be the deciding factor for your investment decisions, the article suggests putting the least tax-efficient investments you have, such as taxable bonds, in accounts where taxes are deferred (like 401(k)s and IRAs). At the same time, use your taxable accounts for investments that are more tax-efficient, like ETFs and municipal bonds.
These 6 habits are fairly simple, the article concludes, and by adopting them you could be well on your way to financial success.