In previous articles talking about your wealth, we established that growing, managing, and protecting your wealth would require making financial investments. Financial investments come with risk which we also established could be best managed through following some basic principles enumerated as follows-:
- Assess your risk appetite
- Diversify your investments
- Determine your timing
- Use averaging to your advantage
- Start investing early and re-invest your gains
- Regularly review and re-balance your portfolio
In this article, we discuss and review what the habits of successful investors look like and how we should adopt them to be successful. The one thing you can be certain about stocks, bonds, and other financial assets we recommend you invest in to manage your wealth, is that they will fluctuate in value. Sometimes fluctuations also known as volatility, may increase as a result of various economic, financial, political, or natural events. Seasoned/successful investors accept volatility as inevitable and chart their course around it. While they do not assure success, here are five principles followed by successful investors:
- Invest for the long term
- Use market corrections(decline in the price of a security) as an opportunity
- Avoid stop-and-start investing
- Diversify, diversify, diversify
- Don’t be swayed by short-term sentiment
Invest for the long term
Of all the investment asset classes available to investors, history shows stocks (shares) typically out-perform other asset classes over the longer term. For some of the wealthiest people in the world today, their net worth is closely linked to the value of stocks/shares they own. Although stocks are usually more volatile than bonds, they are potentially more rewarding over the longer term. While many factors affect stock prices in the short term, long-term returns are primarily driven by rising corporate earnings from the underlying value created by the business being conducted.
Use market corrections as an opportunity
Market corrections usually refer to short periods of poor market performance. This means periods when the value or price of financial assets drops by 10% or greater from its most recent peak for any variety of reasons. Not only are market corrections normal, but they can also create some of the best opportunities to increase the potential for returns and minimize the potential for losses by making financial assets cheaper relative to their earnings potential.
Avoid stop-and-start investing
Instead of trying to time the market or being swayed by various market fads, euphoria, or pessimism, investors would be better off investing a set amount of money at regular intervals in a systematic investment plan. This not only helps you avoid the pitfalls of mistiming the market but also lets you gain exposure during upturns and downturns – thus, averaging out the cost of investments ultimately.
Diversify, diversify, diversify
This strategy is borrowed from the age-old saying, “don’t put all your eggs in one basket”. Even the most astute of investors find it challenging to identify the market or asset classes that are likely to outperform or underperform. Owning a diversified basket of equities, bonds, and other assets spread across different markets and more importantly currencies, may help to shield investors from various asset- or market-specific risks while providing long-term returns. Such a diversified portfolio is also less volatile, which may help to protect investors from volatility-related risks.
Don’t be swayed by short-term sentiment
The final point relates to psychology – successful investing requires a dispassionate frame of mind. It is hard to remain unruffled when markets fall sharply in reaction to unexpected events. Instead of reacting in a knee-jerk fashion, a successful investor would usually study the unexpected event, weigh it against long-term investment objectives and, if required, tweak his investments accordingly.
These 5 habits applied are no guarantee of positive investment performance but in combination with professional financial advice can help to increase your chances of growing your wealth through financial investments.
Olusegun Omoniwa is the General manager for Wealth Management and Affluent in Botswana and Southern Africa (Zambia and Zimbabwe), as well as the Acting Head of Consumer, Private & Business Banking for Botswana. Through its Financial Markets teams and in partnership with asset management firms and insurance companies, the Wealth Management team provides a range of products and solutions to help our clients grow and protect their wealth. Our clients span the full spectrum, from individuals to small businesses and corporate clients. We have teams of Investments Advisors, Insurance Specialists, and Treasury Specialists who interact with clients, and Relationship Managers who provide expert insights on local/global markets and specialist advice.