Seven habits of highly effective investors

Habit One: Know where you are heading before you start, You need a goal.

You need to know what you are investing towards, instead of simply aimlessly throwing money at the market.

Are you investing for retirement? Well then you can’t risk the bank…

Are you trying to hit a homerun and get some extra cash for an international holiday? Well then you can take some more risk…

Decide what you are investing for, and what you want to achieve over the long-term, medium-term and short-term.

Work back to the smaller goals you need to achieve to reach your big end goal.

Whatever your goal is, the point is you need a goal. When investing your goal will determine in which shares, derivatives or asset classes you invest in, which investment vehicles you use and how much capital you need.

Habit Two: SAVE, early and automatically

It might be that your employer has a compulsory pension fund. In that case you are saving automatically. But you shouldn’t stop there.

Even if you only save R100 or R500 extra each month – that can help you reach your goals.

The best is to set up a debit order to automatically pay money into a brokerage account or investment account.

That way you can’t ‘forget’ to save.

You may find you don’t miss what you don’t see in your checking account. If you get a raise or a bonus, give your savings a raise, too.

The point is just to program the habit of saving into your life. Watching your money grow can be very motivating.

Habit Three: Surround yourself with the right people

Unless you just want to swop your day job for a job as a professional investor you should get the right people to help you.

Get a good accountant.

Paying off your account a couple hundred bucks can get you a big tax discount at the end of the year. Also, you don’t want the hassle of doing your accounts yourself, your time is worth more. More importantly, a good accountant or broker will help you set things up to minimize taxes.

Work with a broker or wealth advisor you can trust.

You need to build a relationship with your broker. Doing this will keep you top of mind and will result in them passing great deals along to you, before he does to other customers. He’ll do so because you’re a regular investor and more likely to make him commissions.

Lastly – I find that if none of your friend or family invest, it is just that much harder for you to do so. Simply put, surround yourself with people that invest and grow their money with you. Motivate your friends or family to join you.

Habit Four: Highly successful investors take calculated risks.

It takes guts to invest the money you’ve earned, paid taxes on and foregone spending, and expose it to potential losses.

But super-safe investments like money markets, fixed deposits or unit trusts barely even keep up with inflation. High-returning assets fluctuate in value, sometimes wildly and at totally unexpected times. That’s just the price of admission. Get used to it.

You need to understand the risks you take. But also understand that without taking risks, you cannot make money.

Habit Five: Keep fees low

With many people expecting future stock market returns to be muted, it will be more important than ever to keep an eye on the fees charged for your various accounts and investments.

Fees have come down for many investment products in recent years, particularly in index funds and exchange-traded funds.

But these days there are also online brokers that offer rock bottom fees, and very low minimums. There are even brokers that make it possible to start investing with as little as R100.

Simply put – find out what fees you are paying on your investment accounts, funds and the like. Shop around and see if there’s options to reduce these fees.

Half a percent in fees on a million rand portfolio over a 20 year period can become a massive amount of money…

Habit Six: Highly successful investors are disciplined

You have to make buy and sell decisions based on a system, or a set of rules.

Not for emotional reasons, based on a hot tip your dentist told you about or what your neighbour is investing in.

My PowA! Penny share screening system looks at the profits of a company, its directors and management credibility, the company’s assets and whether there is a specific catalyst to fuel the stock’s growth going forward.

Similarly – I set profit targets which guide me when to sell when a stock rises. I also have a set of rules I look at to determine whether to sell.

The stocks you own should meet key criteria before you buy them. That might include certain sales and earnings growth, return on equity, product innovation, quality of management, or insider buying. Sell disciplines vary, including annual rebalancing for index funds and trailing stops for individual stocks. These will increase your returns while reducing risk.

Habit Seven: Stick with your plan, even when markets look unfriendly

When the value of your investments falls, it’s only human to want to run for shelter. But the best investors don’t. Instead, they maintain an allocation to stocks they can live with in good markets and bad.

The financial crisis of late 2008 and early 2009 when stocks dropped nearly 50% might have seemed a good time to run for safety in cash. But a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during that time were far better off than those who sat on the sidelines.

In the decade following the start of the crisis in June 2008, those who stayed invested saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%. That’s twice the average 74% return for those who fled stocks during the fourth quarter of 2008 or first quarter of 2009. While most investors did not make any changes during the market downturn, those who did made a fateful decision with a lasting impact.

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