Work to become a better investor
August 28, 2014
On Monday, we observe Labor Day — a celebration of the American worker. Of course, you work hard at your own job, but, when you think of it, every worthwhile endeavor in life requires significant effort — and that's certainly the case with investing. The harder you work at it, the more likely you are to make progress toward your goals.
So as you think about investing, consider the following areas in which you will need to apply yourself:
Work to identify your goals. It's important that you know just why you're investing. Do you want to send your children (or grandchildren) to college? Do you want to retire early? What sort of retirement lifestyle do you envision? What kind of legacy do you want to leave? Identifying your financial goals is the necessary first step toward achieving them.
Work to know your own risk tolerance. It's essential that you know your own investment personality — that is, how much risk you can comfortably handle. If you think you can handle a relatively high level of risk, but you find yourself worrying excessively over every drop in the market, you may need to re-evaluate your risk tolerance and adjust your investment habits. Conversely, if you believe yourself to be highly risk-avoidant, but you find yourself frustrated over the relatively low returns you get from conservative investments, you may need to revise your thinking — and your actions.
Work to avoid bad habits. Many investors chase after "hot" stocks or try to "time" the market. However, hot stocks can cool off quickly, while efforts to predict market highs and lows are doomed to fail — because no one can accurately forecast those points. You will want to be especially diligent about learning to look past the headlines and beyond short-term price movements in the financial markets — because too many people overreact to these events. If you can avoid these bad investment habits, you'll be doing yourself a favor.
Work to follow a consistent investment strategy. If you invest over the course of several decades, you are going to see a lot of ups and downs in the financial markets. And when the markets get choppy, you may be tempted to take a "time out" from investing. But if you do this repeatedly, you will certainly interrupt the progress you need to make toward your financial goals. If you can develop the discipline to follow a consistent investment strategy and to keep investing in all types of markets, you have a pretty good chance of "smoothing out" the effects of market volatility over time. And, as a bonus, you'll be far less likely to concern yourself over day-to-day price fluctuations.
Work to review your progress. Along with your financial advisor, consistently review your progress toward your goals. Your investment professional should establish your portfolio review frequency and meet with you to discuss your investments at least once a year.
So, there you have it — some ideas on how you can work to be a better investor.
Doug Drost is a certified financial planner for Edward Jones, 2262 Reno Highway.