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10 things successful investors don’t do

Reprinted courtesy of MarketWatch.com.

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I’m a longtime fan of Warren Buffett, and I often refer to one of my favorite Buffett quotes: “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

With that in mind I’ve compiled the following list of 10 things that successful investors don’t do. If you’re doing any of these, I hope you’ll change your ways.

1. Successful investors don’t start at random, without a plan, any more than they would start a road trip without at least a map and a destination in mind. The evidence is overwhelming that random investments made without a plan seldom, if ever, lead to success.

Your investment plan doesn’t have to be fancy, but it should be based on where you are (your current financial situation) and your destination, presumably a comfortable retirement by a certain time in your life.

Read: Why picking stocks is only slightly better than playing the lottery

Your plan should call for specific action steps you will take. Successful investors expect to reach their goals over time, by identifying the right things to do, and then doing those things over and over and over. Saving money regularly is the most basic of these useful behaviors.

 

To get (and keep) your plan squarely on course toward retirement, check out this free chapter from my book Financial Fitness Forever.

2. Successful investors don’t plan to retire on the returns from their investments. They rely on the money they actually save, hoping the market will at least keep those savings up with inflation.

Successful investors save regularly, as a core financial habit, and they save as much as they can.

Last year, Fidelity Investments studied the finances of 4,500 households and found that, on average, the single most powerful change that most of them could make to improve their retirement outlook was saving more money.

If at all possible, I recommend you regularly save 15% of your income. Even better: Calculate that 15% in addition to any company match you might get into a retirement account.

3. Successful investors don’t rely on just one investment, or even a handful. They diversify widely, knowing it’s impossible to reliably predict which investments will go up in value and which will decline.

Diversification doesn’t reduce risk, but it spreads your risk around. Over the long run, this will make your ride less bumpy and more comfortable. And that will make you more likely to stick with your plan. In addition, greater diversification often leads to higher returns.

4. Successful investors don’t ignore how much they pay for investment services and products. They keep their costs low, knowing that is one of the few parts of the investment process they can actually control.

A big piece of this means investing in index funds instead of actively managed funds; this single step can easily save you a full percentage point in costs a year.

Over time, those “little” savings matter more than you might think. On a one-time investment of $10,000 that returns 8% over 20 years, cutting your annual expenses by 1% would boost your return to 9%. That would boost your ending value from $46,610 (8% for 20 years) to $56,044 (9% for 20 years). That puts an extra $9,434 in your portfolio—nearly as many dollars as your entire original investment!

5. Successful investors don’t let the ups and downs of the market throw them off course. They realize that downturns and even bear markets are normal—and that weathering these storms is necessary for long-term success.

They do their best to stay the course, avoiding panic buying when prices are going up and steering clear of panic selling when the stock market is tanking. This isn’t always easy emotionally, but it’s vital to your long-term success.

Read: The reason Jack Bogle doesn’t fly first class says everything about his investing legacy

6. Successful investors don’t keep changing their primary objectives as a reaction to the economic news and what the market is doing.

For more than 30 years, I have asked workshop participants and other investors to choose among three primary objectives: (1) beat the market, (2) get the highest return within their risk tolerance or (3) find the lowest-risk way to meet their financial needs.

Far too often, people’s answers seem to correlate with whatever is happening in the market at the time. When things are looking rosy, investors tend to want high returns and beat-the-market strategies. When the market atmosphere is heavy with gloom and doom, investors are most interested in finding ways to minimize risk.

That is emotionally comfortable, but it’s not the right way to chart a long-term investment course.

7. Successful investors don’t ignore the risks of the investments they make.

Sure, when you put down your money, you want to think about the rewards you expect to get.

But the biggest reason investors fail to achieve their goals is because they bail out after experiencing losses larger than they expected. Want to know what to expect? Thousands of investors over the years have benefited from this table, which shows historical worst-case losses from a variety of portfolios.

8. Successful investors don’t expect miracles and don’t base their plans on unrealistic expectations or hopes for good luck. Your luck may be good, but it can just as easily be bad.

When I was an adviser, I encouraged investors to build their plans on expected returns significantly lower than the historical averages. Here’s what that means in general terms: If the long-term trend of the stock market is 10%, make your plans on the assumption that your own stock investments will earn 8%. That will require you (or at least strongly encourage you) to save more. And that in turn will always serve you well.

If your returns exceed your expectations, I promise you’ll have no trouble adjusting. But if things go the other way, you could wind up short of what you need to retire.

Read: Complete this 11-point exercise and learn when you can retire

9. Successful investors don’t ignore taxes.

To whatever extent you can, use tax-advantaged vehicles such as 401(k) and similar plans as well as IRAs, either Roth or traditional, depending on your situation.

Outside these accounts, investment sales generate taxes. Sometimes even the timing of a simple mutual fund purchase can generate unnecessary tax liability, as when you buy shares closely before a mutual fund’s dividend or capital-gains distribution.

Successful investors pay attention to details like this.

10. Having avoided the other traps on this list, successful investors don’t get caught up in the incessant financial commentary on TV. Commentators always have at their disposal two “lists” of explanations for whatever is happening and whatever developments seem to be just over the horizon.

The “good news” list is always filled with plausible arguments for why the market will go up and therefore why investors should buy. The “bad news” list is always filled with equally plausible arguments for why the market is overdue for a downward trend and therefore why investors should sell, or at least avoid buying.

These informal lists don’t exist to help investors. Their purpose is to make it easy for commentators to keep the attention of viewers and listeners — and keep them coming back for more.

Successful investors treat all this as little more than entertainment.

Richard Buck contributed to this article.