Lots of people think you have to be lucky to be successful as an investor. They want to get rich quick by finding the perfect strategy or situation that will change their life like winning the lottery.
There is some truth that stumbling into the right stock, portfolio manager, or tip at a precise time can improve your situation. However, the odds that you will be one of those special few to receive such a windfall are not in your favor.
The real secret is that proper investing takes hard work. Success is earned through constant adherence to a strict regimen – even if it doesn’t immediately bear fruit. That mantra holds true for both passively managed portfolios and those that take a more active approach.
Let’s face it, no one is truly passive. Even investors who think they are still have homework they need to complete while their money is working towards their goals. They need to be on the lookout for investment vehicles with similar or better features and lower costs.
They need to be scheduling regular checkups to ensure their asset allocation is in line with their risk tolerance and goals. They need to be avoiding any outside noise that conflicts with their philosophy and putting in time to review their chosen path. Being passive is actually a lot of work.
For buy-and-hold investors, the hard work is simply not doing anything, even when you REALLY want to. That includes avoiding the urge to sell when everything looks terrible or buy more when the market appears so in-tune with your strategy. Strictly adhering to a consistent schedule of adding money or re-balancing is going to be your biggest advantage over the course of your lifetime.
For active investors, the work takes a different path. It involves researching new ideas, evaluating opportunities, and minimizing certain risks. Your stress comes from agonizing over pros and cons of each decision.
You must weigh the risks of each action with the potential rewards that may result from it. Then executing those plans with the knowledge that you made a practical choice with the information you had on hand at the time.
The other day I spent six hours combing the closed-end fund universe. Searching out fresh ideas, comparing existing holdings to potential alternatives, and noting areas that I deemed to be off-limits for one reason or another. It was a painstaking examination that didn’t result in any immediate action steps.
Nevertheless, it’s a systematic exercise that I perform on a regular basis as part of my investment research duties. It left several notable impressions of the current market and enhanced my knowledge of the available options to suit my needs.
The end result was confirmation that my discretionary choices are performing up to my expectations and I was able to add several new ideas to my watch list. This is the kind of hard work that it takes to stay sharp and ultimately one step ahead of the competition.
Side Note: One of the pitfalls of these deep research sessions is “paralysis by analysis”. Too many conflicting opinions or over-thinking every risk can lead you to freeze up and not execute any sort of meaningful strategy.
I’ve been in big investment committee meetings where multiple executives share their points of view and nothing ever gets done. One person says the world is going to end, the other says it’s a buying opportunity, the rest are undecided…so you end up doing nothing. Then the market ends up passing you by and you start the process all over again as new trends develop. It’s a self-defeating circle of death.
There is nothing wrong with seeing both sides to every trade or evaluating a contrarian point of view. However, there must ultimately be a check list or weighing system that objectively evaluates whether a particular investment is made or action step should be taken.
The Bottom Line
The first step to being a successful investor is understanding your style and the reasons for choosing that path. This self-awareness is an extremely beneficial point that you can always fall back on during times of doubt or indecision.
From there, it takes hard work to stick with your chosen path. It won’t be easy no matter what route you choose. However, you can significantly improve your odds of triumph by working harder than those who are quick to give up at the first signs of trouble or become lackadaisical when things are going their way.
Until next time,
David Fabian is a Managing Partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts, and special reports.