BRILLIANT INVESTORS come in many shapes and sizes. Some are value gurus, like Warren Buffett, some are bond bulls like Bill Gross, and some are venture capitalists like Carl Icahn. Yet all of the world’s best and most successful investors share at least three key traits. Let’s take a look at these traits; by cultivating them, you can become the best investor that you can be.
1. Top investors are committed to saving
This may seem glaringly obvious, but the first step to being a good investor is being a good saver. After all, you have to invest with something. So, if you aspire to being a great investor, the first thing you need to do is to draw up a careful savings plan, making sure that you put aside a fair amount of money every month to invest.
This is not as daunting as it may seem. To get started, you’ll need to draw up a budget, and allocate money to all your various expenses. If your first draft budget doesn’t leave you enough money for saving, the next step is to study your expenses, and to find ways to cut back so that you free up money for investing.
At a minimum, you should shoot to save at least 10% of your income – more is better – and you should set that money aside at the start of every month, before you have a chance to spend it on non-essentials. Developing a good saving habit is a crucial investment skill.
2. Top investors understand the value of diversification
Previously I’ve discussed the importance of diversification, so I won’t repeat myself too much here. Suffice it to say that a balanced, diversified portfolio is absolutely vital to long-term investment success. A balanced portfolio will look different for different investors, but achieving balance is critical for all investors.
There are a lot of ways to think about diversification (you can check out some thoughts on the matter here), but essentially an investor should typically balance across different asset classes (stocks, bonds, property) and different regions (emerging markets, developed markets, Asia, Latin America). The idea is that the investor should hold assets that are not all going to rise and fall at the same time – this helps smooth returns, protect capital, and lower risk.
High-return assets like equities are, obviously, important, but even within the class of equities the investor need to think about diversification – large cap vs. small cap, emerging market equities vs. developed market equities, growth stocks vs. dividend stocks.
Diversification is complex, and your best bet is to talk to a financial adviser. The important point is that all of the world’s best investors recognise the importance of diversification, and if you want to be a great investor, you should too.
3. Top investors focus on the long-term
World-beating investors like Warren Buffett invest for the long-term. In fact, for Buffett and many others, all investments are essentially forever – Buffett only buys companies he plans to hold for the rest of his life. While you don’t necessarily need to be thinking quite so long-term (you’ll probably have to sell some of your investments to cover your retirement expenses, after all!) you should certainly be thinking about your investments in terms of decades, not weeks.
Admittedly, there are many traders out there who think of investments in terms of fractions of seconds, but most investors have neither the time, the knowledge, nor the risk tolerance to be high-volume traders. For the majority of investors, the best strategy is to be the kind of investor who thinks long-term, who buys companies that he or she believes will deliver long-term returns.
That way, the investor can ignore short-term market fluctuations and focus on long-term growth, dividends, and prospects. Taking a long-term perspective will give you an investment edge, and help you to be the best investor you can.
Putting it together
None of us are likely to be a world-beating investor like Warren Buffett, but we can all be better investors by cultivating these qualities in ourselves. By saving diligently, focusing on diversification, and investing for the long-term, we can all be the kind of investor whose portfolio delivers solid returns over the years.
1. Top investors are committed to saving
This may seem glaringly obvious, but the first step to being a good investor is being a good saver. After all, you have to invest with something. So, if you aspire to being a great investor, the first thing you need to do is to draw up a careful savings plan, making sure that you put aside a fair amount of money every month to invest.
This is not as daunting as it may seem. To get started, you’ll need to draw up a budget, and allocate money to all your various expenses. If your first draft budget doesn’t leave you enough money for saving, the next step is to study your expenses, and to find ways to cut back so that you free up money for investing.
At a minimum, you should shoot to save at least 10% of your income – more is better – and you should set that money aside at the start of every month, before you have a chance to spend it on non-essentials. Developing a good saving habit is a crucial investment skill.
2. Top investors understand the value of diversification
Previously I’ve discussed the importance of diversification, so I won’t repeat myself too much here. Suffice it to say that a balanced, diversified portfolio is absolutely vital to long-term investment success. A balanced portfolio will look different for different investors, but achieving balance is critical for all investors.
There are a lot of ways to think about diversification (you can check out some thoughts on the matter here), but essentially an investor should typically balance across different asset classes (stocks, bonds, property) and different regions (emerging markets, developed markets, Asia, Latin America). The idea is that the investor should hold assets that are not all going to rise and fall at the same time – this helps smooth returns, protect capital, and lower risk.
High-return assets like equities are, obviously, important, but even within the class of equities the investor need to think about diversification – large cap vs. small cap, emerging market equities vs. developed market equities, growth stocks vs. dividend stocks.
Diversification is complex, and your best bet is to talk to a financial adviser. The important point is that all of the world’s best investors recognise the importance of diversification, and if you want to be a great investor, you should too.
3. Top investors focus on the long-term
World-beating investors like Warren Buffett invest for the long-term. In fact, for Buffett and many others, all investments are essentially forever – Buffett only buys companies he plans to hold for the rest of his life. While you don’t necessarily need to be thinking quite so long-term (you’ll probably have to sell some of your investments to cover your retirement expenses, after all!) you should certainly be thinking about your investments in terms of decades, not weeks.
Admittedly, there are many traders out there who think of investments in terms of fractions of seconds, but most investors have neither the time, the knowledge, nor the risk tolerance to be high-volume traders. For the majority of investors, the best strategy is to be the kind of investor who thinks long-term, who buys companies that he or she believes will deliver long-term returns.
That way, the investor can ignore short-term market fluctuations and focus on long-term growth, dividends, and prospects. Taking a long-term perspective will give you an investment edge, and help you to be the best investor you can.
Putting it together
None of us are likely to be a world-beating investor like Warren Buffett, but we can all be better investors by cultivating these qualities in ourselves. By saving diligently, focusing on diversification, and investing for the long-term, we can all be the kind of investor whose portfolio delivers solid returns over the years.
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