5 Principles That Will Sharpen Your Skills as an Investor

Have you ever embarked on a home improvement project? …One perhaps that you are confident in completing, but unfamiliar with the details. A “how to” clip is usually available on YouTube, but there isn’t a practical way to reach out with follow-up questions. What you may need is guidance from a caring individual. 

This is where your local home improvement store comes into play. I usually have good luck with Home Depot. The employees not only know their craft exceedingly well but are excited to share their ideas.  I'm always impressed with the greeter at our local store who welcomes guests and can direct them to the exact aisle of the item(s) that they're there to purchase. You can see it in their body language and the sparkle in their eyes when they explain the nuances of a project. Plus, they are happy to share any problems you might encounter and how to sidestep pitfalls.

They are, in one word, educators. What they have taught me and what I’ve learned through various projects in life is a fairly simple concept: “Experience isn’t the best teacher–someone else’s experience is.”

I am driven to help you accomplish your many goals. When I ponder the fact that you have entrusted me with your finances, your financial goals, and your dreams, it is truly humbling.

I understand that that there are differences between a financial plan and a home improvement project, but they have one commonality–they are linked by the educational component.

Just like the friendly employee at the home improvement center who thrives on his/her customer’s understanding of a project, I experience the same thrill when you begin to grasp the basic skills that make for a successful investor.

This month, my goal is to share with you some of the basic building blocks that will put you on the path to becoming a better investor. Even the best of the best never stop learning. 

In fact, being a lifelong student might just be the first principle of becoming a great investor.

1.  Create a long-term plan and follow that plan

“A plan is a bridge to your dreams. Your job is to make the plan or bridge real, so that your dreams will become real. If all you do is stand on the side of the bank and dream of the other side, your dreams will forever be just dreams. First make your plans real and then your dreams will come true.”
                                           —Robert Kiyosaki, the author of Rich Dad Poor Dad

I have assisted many of you in developing a long-term financial plan that’s designed with your financial goals in mind. Great investors have a financial plan which becomes their guide. It is a financial roadmap that puts you on the best path to your financial destination. It is the bridge to your dreams.

2.  Learn to control your emotions

Successful investors learn how to control their emotions. When it comes to investing, we want to rein in our feelings and emotional responses by turning to our financial plan and relying on logical decisions to direct our course. 

A well-thought-out financial plan based on empirical research provides us with boundaries. It keeps us on track when storm clouds gather.

I recognize that financial plans are not bulletproof, but I'm confident that they put people on the best long-term path for reaching their goals. 

I also know that when volatility strikes, some folks take it in stride while others may want to take a detour from the plan. They are tempted to react emotionally.  It's simple but not easy – that's what I'm here for.

While heading to the safety of cash may feel good in the short term, I’ve seen the anguish of those who have opted for the sidelines near a market bottom and then watch in dismay as shares began to climb. Remember, longer term, markets rise in most years. 

Sticking with your plan helps to avoid mistakes that can be costly in the long run. If you feel too much distress during times of volatility, let’s talk and see if your tolerance for risk has changed.

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3.  Become disciplined and be patient

Like the control over emotions, a financial plan helps to enforce discipline. By design, the plan puts you on a gradual path to wealth accumulation, which requires patience. There are no shortcuts.

We are open to innovation and empirically verified research, but I would caution you to be very careful about  the “flavor of the month” and remain rational.  

Remember the dot-com boom? Like shooting stars, fast-growing companies soared into view for a brief period before fading into obscurity.  

Legendary investor Warren Buffett sticks to what he knows best and invests over a very long-time horizon. His disciplined approach and patience have brought him rich rewards.

4.  You must diversify

Here’s a basic principle: a one-investment portfolio is too risky.  Diversifying among stocks, bonds, cash, real estate, and commodities doesn’t guarantee that there won’t be short-term losses, but it greatly reduces risks and allows you to participate in investments that are rooted across the U.S. and global economy.

5.  Never lose a healthy level of skepticism

A good investor asks questions. Be wary of investments that promise riches or offer returns that are too good to be true. You may see ads that hype strategies that have quickly turned a meager sum of cash into a big pile of wealth. Such claims should be viewed with a healthy level of suspicion. If these strategies worked, wouldn’t high-powered institutional investors implement them? They don’t.

If you come across such a tempting scheme, please ask me to review it. I promise to offer you an objective analysis. I’ll point out advantages, if any. More importantly, I’ll counsel you on the questions you need to pose to those who are asking for your trust. I can’t begin to tell you how much it upsets me when I see someone get scammed.

Let me sum this up by getting back to what is the foundation, or the cornerstone, of becoming a skilled investor. Become a lifelong student. Never stop learning and immerse yourself in the principles I've shared.

Remember that you don't need to understand all of the intricacies of investing. It's kind of like buying a car.  Most people want to be assured that the vehicle is safe, reliable, and can be purchased at a good value – the same principles that I use to build investment portfolios...They don't necessarily want to know about all of the specific components that make up how the vehicle was built.  But if you want to look under the hood and analyze your investments, I'll be happy to explain your portfolio in much more detail with you.