What Makes a Good Investor?

Many people think that being a good investor takes some sort of secret knowledge about the stock market, or extraordinary intelligence when it comes to picking stocks. Turns out, anyone can be a good investor if they follow a few simple steps.

A good investor, for our purposes, is someone who understands what they’re investing in and why they’re investing. They’re in control of their overall investing plan and can consistently contribute to their portfolio over the years.

Four simple do’s:

Do make a plan – This means setting a clear goal (like investing for retirement or your child’s college education), having a dollar amount you’re trying to reach, and setting a time horizon for each goal. If you start investing for your child’s college tuition when they’re five years old, your plan might be to invest for thirteen years with a goal of reaching $65,000 in funds.

Do build a diverse portfolio – You don’t want all your eggs in one basket. Different asset classes (stocks and bonds) will have different rates of return and different levels of risk. A mix of each type can help limit extreme losses.

Do stay the course – Once you’ve set up a plan and have begun to execute it, stick to it. Make consistent and regular investments. There’s no need to check your accounts daily, but you may “rebalance” your portfolio periodically. This basically means adjusting your allocations based on how your goals change. For example, as you get closer to retirement, you may want to have more of your portfolio in bonds, to reduce the volatility your portfolio faces. What works for 25- year-old you may not work for 65-year-old you. bogorupdate

Do keep learning – No one investor knows everything. And, as our world changes, the markets change too. So, it’s important to keep educating yourself on your investment options, fees, and risks. And remember, you can always seek out the advice and guidance of a financial professional if you feel unsure.

Two important don’ts:

Don’t try to time the market – We’ve all heard the catchy and all-too-common investing cliché, “Buy low and sell high.” That’s called timing the market and it’s a fool’s errand. Many “expert” investors have tried and failed at that very thing. The markets will fluctuate. Your returns will vary from day-to-day, but investing is about time in the market, not timing the market.

Don’t make emotional decisions – If you see a drop in your portfolio, it can feel like a stomach punch. Take a deep breath and remain calm. Markets fluctuate daily, and there will be periods where you feel less than confident in the markets. Remember that you have a plan and stick to it.

Becoming a good investor

Good investors are not defined by the huge sums they have to invest, or the secret stocks they know to pick. They design an investing strategy that works for them, and they do their best to stick to it no matter what life brings their way. Harnessing the power of long-term investing comes down to these three basics: invest early, reinvest your earnings, and stay diversified.