One year-end habit of mine is re-reading books that I found particularly helpful or inspirational. Stephen Covey’s The Seven Habits of Highly Effective People, bestseller for five consecutive years is a good place to start.
I think part of this self-help book’s wide influence was its crossover appeal to business executives hungry for simple and powerful strategies.
Some of the book’s habits can be applied to investing and since the book’s first habit was to “be-proactive”, I thought I would share with you my own 7 Habits of Highly Effective Investors…
1. Take Responsibility
The first step is to take responsibility for your investments. Don’t blame others or bad luck for your poor decisions. This is the starting point for all great investors. Do your homework and learn from your mistakes.
2. Put Time on Your Side
Forget about get rich quick schemes and realize that improvements in your financial situation will take some time and require discipline and patience. Put the power of compounding behind your portfolio and reap the rewards.
3. To Get Ahead, Get Organized
Before you even think of building an investment portfolio, you should set aside about six month of income in a “rainy day” account. This could be put into a money market fund or high quality corporate bonds. Having this money set aside will ease your mind and allow you to be more open and patient with your stock portfolios. It also allows you the chance to pounce on dirt-cheap stocks in a time of crisis.
Than separate your investment capital into two portfolios. The first is your core portfolio. Your top priority here is capital preservation and this portfolio should be very diversified and conservative. The second portfolio is your growth & explore portfolio. This portfolio has capital growth as its top priority with higher risk and volatility the price for the potential for high returns.
4. Think Global to Capture Growth
You need to search worldwide for the most promising companies. Why limit yourself to US stocks when you can find great companies anywhere. For your growth & explore portfolio, be open to investing in emerging and frontier markets.
5. Be Careful Where You Invest:
You need some guidelines to help keep you from getting carried away and having too concentrated a position in a particular country or region.
Take a good look at the following: 1) political stability and a level playing field plus low corporate risk, and, 2) a transparent legal system: respect for contracts, low levels of corruption, due process and rule of law.
Investing in a country with double-digit growth but short on the above traits may work for a while but will always end badly.
6. Look for a Combination of Quality & Value
Keep in mind that the quality of the companies and countries you choose to invest in is critical but overreaching when valuations are high is always hazardous. The price of a stock you are considering is extremely important. Oftentimes the best time to buy into a company or stock market is when it is beaten down but only if you see quality and catalysts pointing to a sharp recovery.
“The job of an investment company is to decide to invest in the right thing
in the right place at the right time. But the right thing is the least important. If you picked the very best share in St. Petersburg in 1917 you could be the greatest genius in the world and still go bust…..You have to be able to see the swings in the market.”
— Sir James Goldsmith
7. Manage Risk and Review Performance
We have all been there. You buy a stock or fund and it appreciates in value rapidly. Then it stumbles and begins to decline. Should you buy more, let it ride, or sell to protect your gains?
Save yourself a lot of pain by following a simple rule. If a position ever falls more than 20%, sell it automatically and reassess the situation.
And just like your annual physical, it is wise to review your portfolio annually to make sure you are on track to meet your financial goals.
Put these investing habits to work in the coming year. I think you will be surprised how they will yield higher returns and less stress.
Opportunity awaits,
Carl Delfeld.
