Updated: May 10
More important than market expertise and experience, you’ll need this one quality to be a savvy investor
Everyone wants to know the secret to financial success. When people find out I’m a financial advisor, they expect me to offer up a hot stock tip or an insider investment allocation that will set them on the road to riches. I have bad news folks: It’s just not so simple. But on the brighter side – and there’s always a brighter side — there’s something far easier and more powerful than insider knowledge that anyone interested in investing must have in order to succeed.
In my more than 14 years working with hundreds of families planning for their futures and making investment decisions, the common thread I see in the most successful investors boils down to one simple trait: Optimism.
That’s right. Optimism is the magic elixir that separates your average investing Joes from the Pros. I’m not talking about blind optimism – the ignorant belief that things will never go wrong or investment values will always rise. Sometimes things won’t go as planned — both in our lives and the markets.
That said, the most successful investors see setbacks as opportunities to learn. Rather than sinking into despair, they take advantage of the turmoil. In other words, while everyone else gives up, they don’t quit. Now that I’ve let you in on the secret sauce that allows some investors to rise to the top, what steps should you take to join their ranks?
Start With Your Savings
The first thing you need to do is to make sure you have an adequate emergency fund. Your emergency fund will give you the needed confidence to ride out the investment turbulence you are certain to face in your financial journey. Make sure this fund is not invested in the markets and have it readily accessible should troubles arise.
Depending on your personal financial circumstances, three to six months of living expenses should be an adequate amount to set aside. All the investing pros I’ve advised and encountered over the years make sure to follow this savings guideline. If you can meet your immediate needs with these funds, you’ll have a much easier time viewing your investments optimistically. You’ll feel more ready for the market once this step is completed.
Take A Long-Term View
Underlying true investor optimism is a core belief that the future will be better than the present. It’s very difficult for the average investor to look past the bad news of the day and stay focused on the long term. The pros know the actions they take today will impact tomorrow in a positive way. In 2008, when the financial world seemed to be grinding to a screeching halt, the optimists had faith that the turmoil would pass and they acted accordingly. Taking a big-picture view will help keep you focused on the long-term outcome rather than your quarterly statement.
Part of that big-picture view is thinking about your retirement savings and investments. If you’re going to consider investing in anything while building your emergency fund, make it a 401k contribution up to your company’s match. If you saw a $20 bill on the street, would you pick it up? Of course you would without hesitation. Why would you pass up free money for your retirement account? The pros don’t let these opportunities slip away.
Most investors starting out will find themselves buying shares in a mutual fund – a managed portfolio of investments that allows you to accumulate shares in small increments over time — instead of an individual company. This is usually what you do inside your 401k account and it’s also the most cost-effective way to gain diversification with a modest dollar amount. If you are unsure of the investment options to choose, many 401k funds now offer age based funds that adjust your portfolio automatically as you approach retirement age.
Go With What You Know
When the time comes to enter the investment arena, the superior investor usually keeps things simple by owning what they know. They understand that their investment return over the long term is based on how profitably the companies they own deliver goods and services to the customer. They keep an eye out for the companies producing what they themselves consume. When a new product comes along that improves their life, they investigate to see if it holds investment potential.
This overall awareness gives investors a deeper connection with the companies they own and makes it far easier to brush off a market downturn. Optimists don’t see their investment as simply numbers on a statement, but rather see it as real ownership in the companies that build our quality of life.
For instance, when I talk to my children about their college account investments, I always point out the companies they each would have an interest in owning. My tech savvy son is genuinely excited to know he owns a piece of Microsoft and Apple, whereas my younger boy likes Nike and Under Armour. My 16 year old daughter takes pride in owning her stake in Facebook and Verizon. Now, I’m not recommending you run out and purchase these particular investments. What I’m saying is: Go with what you know, use, and love.
Be an active participant in the future through the investments you make today. Don’t wait until tomorrow. Your time to start is now.
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA / SIPC. Advisory Services offered through J.W. Cole Advisors, Inc. (JWCA). Fourth Avenue Financial and JWC/ JWCA are unaffiliated entities.