So what does it take to be successful?
First of all to be clear, I do not put myself in this category - my report card would probably be marked 'could do better' - so all that follows is what I THINK it takes to become successful.
Legendary US investor Benjamin Graham suggests “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”
It will probably help if you have an interest in personal finance. You will possibly be motivated to read some of the excellent books on the market and follow some of the online investing blogs to learn from the experience of others and expand your knowledge.
There is a great deal written about the world of investing so its probably important to have the ability to sort the wheat from the chaff so to speak. It is not necessary to know everything, or even a lot but it will probably be crucial to your chances of success to understand some of the basics.
For myself, these would include :
- having a simple plan - a good idea of what you want to achieve & how you will get there;
- an understanding of compound returns and the importance of patience/time;
- the importance of keeping costs low;
- maintaining a diverse portfolio and balanced allocation of assets;
- understanding market volatility and mean reversion;
- and finally, an awareness of your emotional make up combined with the ability to make long term rational decisions.
Maybe this final aspect is going to mean the difference between long term success and falling at the second hurdle for many investors. As some with longer term memories will know from the turmoil of 2008/09, the markets can be extremely volatile which evokes equally extreme emotions even for the most hardened and experienced investors.
I well remember the feelings of late November 2008 when it felt as if the end of capitalism as we know it was just around the corner. I also recall the prolonged market falls of 2000 - 2003 including the accounting scandals involving Enron and Worldcom and, of course, the terrorist attack on the twin towers of the WTC on 9/11.
It is very easy to make rash judgements and decisions at such times which may prove detrimental in the long run.
Of course, its not only market volatility which can lead to poor decision-making. Ben Carlson at Wealth of Common Sense believes "..the majority of people are hard wired to make poor decisions. Many times it’s not their fault, but human nature that causes these poor decisions. If you aren’t aware of your inherent cognitive biases you’ll repeat the same mistakes over and over again".
Ben's new book is on my list of books to read this year (be happy to post a review if you are reading Ben!)
It is said that one definition of insanity is to keep doing the same thing in the same way over and over and expect a different outcome each time - its not going to happen!
I believe emotions are a factor with most investors whether they like to admit to it or not. However, with a little more discipline and a simple but solid long term plan or strategy, it should be possible to neutralise some of these effects.
I often drop into the conversations on some of the personal finance boards such as The Motley Fool - it seems to me that many of the threads end up turning a very simple opening post into the most lengthy and complex response imaginable.
Beware Constant Monitoring
When we first begin our investing journey - purchase our first share, investment trust or index tracker - its only natural to keep a close eye on how its getting on.
However, the more we view our portfolio, the more disappointed we will become. This is because, as a species, we appear to be affected far more by a loss than we get pleasure or ‘feel good’ factor from a share price gain.
Although over the longer term, the markets have risen - however on a day to day basis its probably 50:50 whether the markets will be up or down. Therefore if you monitor your portfolio on a daily basis, you are more likely to become unhappy or disillusioned because the cumulative effect of the downers will far outweigh the lesser pleasures of the uppers.
This effect was explained in more detail by Bargain Value and an excellent post looking at positive and negative emotional balances in relation to investing.
Keep It Simple
So, turning back to the original question - what does it take to be successful?
Obviously, success will be subjective and each person will probably have their own concept of what it means for themselves.
I think it will always help, wherever possible to keep thinks simple and to take out as much ‘human’ element from the investing process and implement an automatic strategy. To achieve this will involve avoiding too much complexity as this will inevitably require more interventions - the simpler the plan, the easier it should be to automate and leave well alone.
This is why I like the Vanguard LifeStrategy approach. It essentially involves just three steps
- evaluate your attitude to risk
- select the appropriate fund, and
- select your low-cost ISA or SIPP provider
While the investor is busy getting on with life, the people at Vanguard will ensure the fund is rebalanced on a regular basis. This means the investor will know their investment will always remain exposed to the risk they selected at the start.
Its true, there will be some managed funds which will provide better returns over time but selecting those funds or managers at the start of a 10, 20 or 30 year investing period will be tricky and is a low percentage gamble.
These are some of my thoughts on what it may take to become a success.
Feel free to share your own in the comments section below - you never know, it could just be a light bulb moment for other readers!