Five Habits of the Very Best Investors

by Paul Merriman - MarketWatch

Most investors spend most of their time and energy thinking about what they can get from their investments. That makes perfect sense. 

But there's more than that to investment success.

A few investors are lucky enough to be successful primarily because they were born into wealth and abundance. But the vast majority of us have to rely on hard work and … what else?

If you can put your finger on that elusive "what else" factor that leads to success, you can change your life — and your family's life — for the better. So what is it?

As I researched my 2011 book "Financial Fitness Forever," I posed exactly that question in a series of extended interviews with nine seasoned investment advisers I respect and admire.

One thing that emerged was deceptively simple. Aristotle said it this way: "We are what we repeatedly do. Excellence comes not from our actions but from our habits."

Again and again these nine advisers identified some key habits that seemed to be ingrained in the most successful people among the thousands of clients they have worked with. Pretty soon we realized that successful investors' most effective "secrets of success" were neither secret nor mysterious.

If I had to boil down what we found to just one sentence, I would say that the "perfect investor," if such a person really exists, is somebody who plans for the future and is patient and deliberate in carrying out those plans.

I could boil it down to three words: Planning, perspective and patience.

Or just two words: Good habits.

Habits govern our behavior in the background and let us move through life without requiring us to think about the same issue again and again.

Here are five habits that can help you be a better investor:

1: Setting goals

Successful investors know where they are going and set goals for getting there. Investors who lack clearly articulated and measurable goals tend to dabble in various investment options, hoping they'll find something that works.

But once you set some fixed goals, your investment choices and actions acquire an entirely new meaning. Like a casual traveler who has been handed a road map and a destination, you can suddenly know what you should do.

2: Create a plan — and stick to it

Successful investors make concrete plans to achieve their goals, and then follow the plans. They periodically re-examine those goals, too. In real life, our needs change, circumstances change, knowledge evolves. Rethinking your goals and working to achieve them can become a regular part of your life. I recommend you make this a once-a-year habit.

3: Save regularly

Successful investors save regularly and routinely. In my roundtable discussions among advisers, this was the very first trait that emerged. Every adviser I talked to agreed that this is an absolutely essential ingredient for successful investing. After all, you can't invest money unless you have it; and unless you save it, you probably won't have it.

The best investors find ways to add to their savings automatically. These days, that is pretty easy through payroll deductions and regularly scheduled online transfers. If you want to be among the best, set this habit on automatic.

4: Live on less

Successful investors habitually delay gratification and live below their means. This, of course, is essential to save money. If you know from experience that you can live on less when you need to, then you've laid an important piece of groundwork for a successful retirement.

Some very successful investors take pleasure in demonstrating that they can live on less and still be happy. They're among the people who are most likely to enjoy retirement, since they have deliberately cut the emotional cord between how much money they spend and how happy they are.

5: Stay in the game

Successful investors expect setbacks and stay in the game anyway. I remember opening a retirement account some years back for a woman who had inherited some money. I did my best to let this woman know that she would experience some temporary losses along the way, and she assured me that she was fine with that idea.

A month later, she closed her account after losing about 1% of her portfolio.

I called her, and she told me she remembered my promise that she would experience temporary losses along the way. And she remembered her promise to stick with it when that happened.

"Then why are you closing your account after only a month?" I asked. I've never forgotten her reply: "I thought that we would make some money first before I lost it."

Had this woman remained invested, her portfolio would have gone up nearly 10% in the following eight months. But by quitting prematurely, she locked in her loss and gave up a perfectly sensible game plan.

Is this a habit? I think it is. The best investors are those who can habitually stay the course despite the setbacks they inevitably encounter. This is resilience — another very valuable trait — in action.

Doing all these things may seem like a pretty tough assignment, and in a way it is. If you want to be outstandingly successful, you've got to do what most other people don't do.

The good news is that your habits are within your control.

Here's one piece of parting advice: Don't expect perfection, either from yourself or from the world. We are only humans living in an imperfect world. I haven't lived my life perfectly, and you won't live yours perfectly. What you know, what you expect and what you do will sometimes let you down.

But if you do your best and keep putting yourself back in the game, you'll be the best investor that you can be. That's a good habit to nurture.