What Are the Characteristics of Successful Investors?

Successful Investors Have Reasonable Expectations

The most successful investors have reasonable expectations. Here are some examples:

  • Your investment portfolio will not have “above average” returns each and every year. Be reasonable. This isn’t Lake Wobegon where all the children are above average. The average annualized return of a diversified seven-asset equally-weighted portfolio (pictured below) that included stocks, bonds, real estate, commodities and cash was 9.8% over the past 46 years (1970-2015). During that period there were some individual years where the portfolio performance was above 20% (1975, 1976, 1980, 1983, 1985 and 2003). In those “good” years a reasonable investor client did not crank up their performance expectations of the portfolio—somehow believing now that it’s going to pump out 20+% returns year after year. Likewise, over the past 46 years there have been some discouraging years with negative returns in a diversified portfolio (-5.38% in 1974, -3.41% in 1990, -5.51% in 2001, -1.57% in 2002 and -27.61% in 2008).  Successful investors don’t suddenly lose faith in the portfolio because it stubs its toe a few times.

  • If your portfolio design is based on long-term performance expectations, give it time to show its stuff. A reasonable way to measure the performance of a diversified portfolio is over 10-year periods. For example, over the 46-year period from 1970 to 2015 the diversified seven-asset portfolio shown above never experienced a 10-year negative return. In fact, the average 10-year rolling return (there were 37 of them during the 46-year period) was 10.7%. Successful investors understand that long-term investing is measured in years, not months. (For related reading, see: 10 Tips for the Successful Long-Term Investor.)

Successful Investors Discipline Themselves  

Successful investors discipline themselves across several key behavior patterns:

  • Adequate savings rate during the accumulation years. Successful investors recognize that a well-designed retirement portfolio has to be adequately fed. Set a goal to invest 10-15% of your annual income into your retirement portfolio. But if you can only save 4% right now—do that. Focus on what you can do, and then consistently do it.
  • Systematic rebalancing is another common behavior of disciplined and successful investors. Rebalancing a portfolio keeps the various ingredients at their assigned allocations as the years go by. This is accomplished by withdrawing money from the mutual funds which performed best during the prior period (often one year) and investing it into the mutual funds which performed poorest. This is the part of rebalancing that may seem counter-intuitive, but is exactly how we achieve the basic mantra of investing, which is to “buy low and sell high.” Except that the order is reversed: you sell high and buy low in the process of rebalancing. Rebalancing a diversified seven-asset portfolio had a higher ending balance in 78% of the 27 rolling 20-year periods between 1970 and 2015 compared to a seven-asset portfolio that was never rebalanced. (For related reading, see: Rebalance Your Portfolio to Stay on Track.)

Successful Investors Diversify & Measure Investment Success

Building a diversified portfolio is like making salsa—we blend a variety of different ingredients together, and the result is greater than the sum of the parts. After building a diversified portfolio successful investors measure it correctly. Some investors may be tempted to compare their diversified portfolio against the S&P 500 Index—but that is nonsense. The S&P 500 is not a diversified portfolio, but rather 500 large U.S. companies. It contains no bonds, no real estate, no commodities and no foreign stock. Consider this: the S&P 500 represents 500 different varieties of tomatoes whereas a diversified, multi-asset portfolio represents salsa. (For related reading, see: How to Build a More Diversified Portfolio.)

Successful Investors Lead Balanced Lives

This statement does not imply that successful investors don’t face challenges in their lives—they most certainly do. But, successful investors tend to focus on things that are going well, rather than things that are not. They focus on progress, rather than distance from the goal. In short, successful investors have a balanced perspective on life that acknowledges challenges and struggles, but with an overriding spirit of optimism and courage. 

Successful investors not only have diversified portfolios, but they also have diversified lives. This type of life balance provides the needed anchors when one aspect of life takes a severe blow. Physical, emotional, social and spiritual balance are needed. Without life balance, small issues are often blown out of proportion into big issues. Even worse, non-issues can become major obstacles without a balanced perspective. Successful investors recognize that wealth is not the end goal, but a means to accomplish one’s life goals. (For more from this author, see: How to Start Investing With Just a Little Bit of Savings.)

In summary, successful investors have a healthy life balance, are reasonable in their expectations, disciplined in their behavior and measure success according to their own specific objectives and goals.