The 5 Essentials to Becoming a Successful Investor

“The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control.

Where then do I look for good and evil? Not to uncontrollable externals, but within myself to the choices that are my own…”

Epictetus

A successful investor is one who focuses on what is inside of their control, instead of concerning themselves endlessly with what is outside of their direct influence.

The media (both legacy and social) firmly direct our attention towards what is outside of our control. Keeping us hooked on a steady drip of highs and lows, short-lived dopamine hits and bouts of severe FOMO (fear of missing out).

For example, in 2021 it was outlandish returns and in 2022 it is stunning crashes and inflation.

Having your thoughts, feelings and actions dictated by others is no way to live – not just with investing, but life as a whole.

To quote White Goodman, you have to grab the bull by the horns!

Yeah, that’s me, grabbing the bull by the horns. It’s how I do business.

It’s a metaphor.

That actually happened, though...

So, to assist you grabbing the proverbial (or real) bull by the horns, here’s a list of the 5 essential things that are directly in YOUR control when investing!

1. Asset Allocation

This is the biggest factor in determining your return.

Asset allocation = where you choose to invest your money.

Studies have shown that c.90% of a fund’s return is down to asset allocation!!

Everything else is about investing accounts for only c.10% of your expected return – so pay v.close attention to your asset allocation!!!

The main assets you’ll come across in funds are bonds and equities and you’ll need to choose how much of your money is invested into them.

Bonds = corporate/government debt (you loan them your money for interest payments). 

Equities = stocks and shares, being a part owner of the largest and most successful companies. 

Bonds give you less short-term volatility, with less return over the long term. 

Equities are the reverse, more volatile but decent gains over time. Your money is working for you each day and compounding over time. It is the asset class for building long term wealth:

Source: JP Morgan Guide to the Markets

Here are some blog posts about investing in equities:

Owner > Consumer

Simple Wealth, Inevitable Wealth: An Ode to Equities

Volatility vs Risk (check this one out if you unsure about risk!)

“A Globally Diversified Basket of Equities”… WTF does that even mean?!

If you are wondering, my investment portfolio is 100% equities.

2. Costs

The costs you pay to invest reduce your net return – the main costs you’ll see are fund and platform charges.

The more you pay in fees, the less money you have working for you – this is negative compounding.

You want minimal fees, as they stack up over the long term. 

In every single time period and data point tested, low-cost funds beat high-cost funds“.

Morningstar

Utilising a nifty tool from Candid Money, let’s look at the impact of fees on £100k over 30 years:

0.35% is the total annual charge for my ISA, which covers platform and fund fees. 1% is a pretty standard charge I’ve seen people paying for a similar service.

The above shows the big impact fees have on our investment returns.

When it comes to funding the lifestyle you want in the future, that extra £115k would be mucho helpful!!!

3. Diversification

As I’m sure you know, it’s about not having all your eggs in one basket

You want your money spread over lots of different companies (and/or bonds), across different regions

The reason for this is we cannot know in advance where the best returns will come from. So ‘catch ’em all‘ and benefit from the cream rising to the top. 

Whilst the US, and the S&P 500 in particular, is often talked about online, it isn’t the best performing country every year. 

Check out the below graph which shows the randomness of returns by region (the light-ish blue is the US):

Source: Dimensional

As we do not know what will happen in the future, it is best to hold a global portfolio – so you can capture all the returns

The below shows that whilst the US makes up nearly 60% of the global market, by only investing there you are missing out on the other 40% of companies around the world providing returns:

Source: Dimensional

Moral of the story, do not pin your financial future on one country or company!

For more info on diversification, click here.

4. Automation

Building wealth involves good habits being performed consistently over time.

We as humans are flawed, emotionally-driven creatures – which is great for some things and terrible for others.

Unfortunately, good habits can easily be derailed by our emotional state.

When we are in the right frame of mind it is easier for us to perform positive habits. However, if we are in a bad frame of mind making good decisions becomes difficult, or seemingly unimportant.

James Clear, author of Atomic Habits, has worked out the formula for success. The key is to put fewer steps in place between ourselves and good behaviours and more steps between ourselves and the bad ones.

With automation we can take it one step further and remove ourselves from the equation entirely!

Once we have automated our savings, our wealth is free to grow to heights which otherwise may not have been possible with our continued input.

We are then free to go about our lives whilst good financial behaviours are happening automatically in the background – brilliant!!

Once you have a system is in place it is low maintenance and will only require the occasional review (hopefully to increase the amount you save as you earn more).

5. Your Behaviour

As mentioned above, our habits and behaviours can have a detrimental impact on our ability to become a successful investor.

The longer you stay invested, the higher your probability of generating a positive return

You want to avoid tinkering and trying to time the market. Buy and HOLD

Get the above 4 points right at outset then set and forget. Research has shown people often lose 1% or more per annum by buggering about too much with their investments

It is all about staying disciplined and ignoring the noise. 

6. Summary

Automate the above, leave it alone and manage your behaviour. You’ll wake up one day to discover you are wealthy!!

Thanks for reading 🙏

Tom Redmayne

Associate Financial Planner/Fighter of Bulls

PS, go watch Dodgeball if the bull reference went over your head 😉

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