Some people are successful investors, while many are not.
A few do well on their own, others do well with professional advice. There are other investors who do poorly — or disastrously — either on their own or with an adviser.
When we look at the factors that lead to investing success, we find contradictions, but a lot of consistent principles, as well.
Much has to do with psychology.
Some investors expect their advisers to be able to accurately predict the future, which they cannot. Those investors are angry with their advisers when the market goes down and their investments decline in value.
They often change their adviser, their investments or their investing strategy at just the wrong time.
Lesson: Be clear about the investing environment, and separate facts from myth, before reacting. And respond, don’t just react. Your instincts can be powerful, but your impulses may be damaging or dangerous, if acted upon thoughtlessly.
Some investors abandon a successful long-term investment strategy, because they find it “boring” or because they have heard from a friend about a recent “home run.” Those investors should carefully examine their motivation, and perhaps work out their gambling urges in a safer place.
Lesson: Be clear on why you are investing. If it is to make money over time and achieve your retirement goals, then great. You will likely make a lot of good decisions. On the other hand, if you really like the excitement or the “game,” and it’s all about hitting home runs, then you may need to turn your core investments over to a professional manager, and set aside a limited amount for your “play money.”
Lesson: Don’t throw the baby out with the bath water. Make sure you are blaming the right factor. It’s unfortunate when temporary poor results — either from bad timing, bad markets, bad advice or combination of all those — compels an investor to “do it myself.” This is especially unfortunate when the results have actually been pretty good when viewed in the proper context.
Your optimal asset mix should be unique, based on your time horizon, need for liquidity, need for income, your personal risk tolerance, and other situational factors. If you get that mix right, then you can take advantage of the long-term growth of equity prices and the tax advantages of dividends, and you can even profit from the periodic drops in equity prices, because you will have the cash reserves to buy stocks when they go on sale.
By systematically rebalancing your portfolio, you will automatically buy low and sell high, and remove the limitations of investor psychology from the equation.