Five habits of highly effective investors

 A financial advisor takes notes for a client meeting.

Volatility in the markets are a reminder that market conditions can change quickly. Your investment approach, however, doesn’t have to. Everyone's situation is unique and, as such, deserves a personalized strategy. At the same time, we think there are certain behaviours and actions that are widely consistent among investors that put themselves in the best position for investing success. We believe adopting these "habits" can help you to navigate the ups and downs of the market and help keep you on track toward your long-term financial goals. 

In our view, highly effective investors:

1. Are goal oriented. 

You wouldn’t build a house without a blueprint, right? For starters, it documents the vision of what you're trying to construct and captures the personal details in a home that make it your own. Second, it serves as the guide for the construction process, providing reference points along the way. It's similar for investors - your goals are the design of what you're investing to achieve, with your personalized financial strategy serving as the blueprint to achieving the things that are most important to you. Investment conditions shift (like we've seen this year) and personal situations can change, sometimes so much so that it can be easy to lose focus on the bigger picture of what you're trying to build. Investors that design a strategy tailored to their goals are typically in a better position to achieve them because they have a blueprint to serve as a concrete reference and to measure progress against.

2. Regularly check their GPS. 

Left unattended, a small deviation from your intended path can put you further off course as time passes. Effective investors recognize the importance of regular checkpoints which help them remain on track. They use systematic financial reviews to assess their current situations, evaluate existing goals, establish new ones and revisit their tolerance for risk. Any changes are incorporated into their investment strategies because they know regular course corrections can help prevent bigger surprises down the road. In particular, effective investors quickly regain their balance. Even well-diversified portfolios will experience imbalances as different investments ebb and flow over time. Successful investors identify the allocations that are appropriate for their longterm strategy and then make adjustments as weightings and investment conditions change. Their rebalancing strategy helps them to set appropriate expectations for the risk and potential return they can expect from their portfolio over time.

3. Don't put all their eggs in one basket. 

This cliché may be old, but it still rings true as the value of diversification was on display during this year’s market volatility. Constructing a well-built portfolio starts with the appropriate allocation between equities and fixed income. From there, effective investors look to additional layers of diversification, building the mix of domestic and international investments, followed by assembling a broad mix of asset classes (large-, mid-, small-cap stocks; investment-grade, high-yield, international bonds; cash; etc.), and then looking further to equity-sector and bond-maturity diversification. The value is seen in their results. As this year’s market selloff demonstrated, not every investment will be a winner all the time. But a well-designed portfolio includes a mix of investments that complement each other, with some outperforming as some lag, and vice versa. For example, as the stock market declined in February and March, bonds rose sharply, helping provide stability for well-diversified portfolios. Diversification does not ensure a profit or protect against loss in a declining market.

4. Put time on their side. 

Effective investors evaluate market moves against a calendar (marked with their financial goals), not a stopwatch. While headlines have the tendency to prompt knee-jerk reactions, investment decisions are best made with a broader perspective. For example, when viewed on a yearly basis since 1976, the stock market has been positive 82% of the time. However, a balanced portfolio (65% stocks, 35% bonds) viewed over five-year timeframes has been positive 99% of the time.1

Diversification and a Long-Term View vs. Yearly Market Returns

$10,000 Invested since 1990 vs annual returns

This chart shows the S&P Index of the Toronto Stock Exchange (TSX) has been positive a vast majority of the time (22 out 30 years) since 1990. However, $10,000 invested in a balanced portfolio (65% stocks, 35% bonds) since 1990 has been positive 99% during the same 30-year time period.

5. Stay cool when the market's temperature rises.

No one likes market volatility or declines, but effective investors are appropriately prepared before downturns happen by raising the quality of their investments, enhancing their portfolio diversification and setting realistic expectations for market fluctuations. And when pullbacks emerge, effective investors stay calm, focus on economic and market fundamentals instead of sensational headlines. Importantly, they base their investment decisions and adjustments on their goals, not short-term swings in stock prices. Doing this allows them to survey the room for opportunities when others are scrambling for the exits.

Talk with your Edward Jones advisor about opportunities to put these habits into practice to help ensure you stay on track toward your goals.

Important information:

1Source: Morningstar Direct, 1/1/1976 - 12/31/2019. Past performance of the markets is not a guarantee of how they will perform in the future. The hypothetical portfolios are for illustrative purposes only. Results may vary for a portfolio with similar holdings. The hypothetical portfolios consist of:

1) 100% stocks represented by the S&P TSX Total Return Index.

2) Balanced Toward Growth Edward Jones Portfolio Indexes are unmanaged and are not available for direct investment. Investing in stocks involves risk. The value of your shares will fluctuate, and you may lose principal. The prices of bonds can fluctuate, and an investor may lose principal value if the investment is sold prior to maturity. There are special risks inherent to international investing including those related to currency fluctuations and foreign political and economic events.