Investing

6 Traits of Highly Effective Investors

No two investors are alike, but the most effective investors share these traits.

by Mark Tosczak - June 11, 2018

Every investor is unique — different circumstances, different goals, different plans. But effective investors often share similar traits that all investors can learn from.

In fact, many effective investors have these six behaviors in common, says Tracie McMillion, Head of Global Asset Allocation at Wells Fargo Investment Institute.

1. They start investing early. It’s math: The more years investors begin to invest, the more money they may be able to earn through the power of compounding. “Starting early means a longer investment time horizon,” McMillion says. “And that long time horizon allows you to invest in assets that have more growth potential over time.”

Of course, not everyone starts as early as they might have liked. But starting sooner is better, McMillion says. If you have kids, encourage them to start saving and investing as early as possible, too.

2. They prioritize their goals. Investors can think of their goals in terms of short-term, intermediate, and long-term, McMillion says. A short-term goal might be buying a car or paying for a home remodel. Intermediate goals are for the next three to five years; those might include saving to buy a new house or saving for college.

Long-term goals are those that are more than five years out, such as “investing for legacy goals, whether that’s charitable or family-oriented,” McMillion says.

With clear goals and a clear time frame, investors can prioritize. “That helps  develop asset allocation because an investor has time horizons around those goals,” McMillion says.

3. They save consistently. People who consistently save a portion of their income generally reach their goals faster, McMillion says. Those who make contributions to their retirement savings every year, as opposed to those who skip some years, can accumulate more. And with more money saved and invested, they’re more likely to reach their goals.

4. They’re comfortable taking risk. Successful investors know that for the potential to grow their assets faster than inflation, they’ll have to invest in assets with a higher than expected return, such as stocks, which carry higher levels of risk.

“If investors are not comfortable taking risk, then an investor is limited in investment choices to things like cash alternatives and short-term government bonds,” McMillion says. Those, she says, haven’t beaten inflation the last few years, denying investors the potential for real growth.

5. They diversify. Having too much of your money in a single asset or asset class increases risk, which is why effective investors diversify.

Investors spread their money among different asset classes — stocks, bonds, real estate, commodities, and others — and also diversify within those asset classes. That might mean, for example, owning stock of U.S. companies as well as companies in other countries.

“All of them can work together to provide more consistent returns over time,” McMillion says.

6. They’re “tax-wise.” Finally, effective investors take taxes into consideration when making investing decisions. This is especially true, McMillion says, of investors subject to higher tax rates.

Investors, for example, might choose to move money from taxable accounts into assets with lower or no tax obligation, such as municipal bonds. They might also choose between investments taxed at income tax rates and those at lower capital gains rates.

Taxes should never be the sole driver of an investment decision, McMillion says, but making tax-wise investment decisions can help maximize after-tax returns.

Whether it’s taxes, managing risk, diversification, or just developing clear goals, effective investors don’t make these decisions alone, McMillion says. “You definitely want to consult your financial advisor and your tax advisor.”

Mark Tosczak has spent 25 years wrangling words for newspapers, magazines, businesses, nonprofits, and other organizations. He focuses on health care, science, and business.

Image by iStock

Additional Resources

Learn four truths all investors should know about risk.

Risks:

All investing involves risk including the possible loss of principal.  There is no assurance any investment strategy will be successful or will meet its investment objectives.

Diversification cannot eliminate the risk of fluctuating prices and uncertain returns.

Different investments offer different levels of potential return and market risk. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile.  Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.  Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility.  Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility. Real estate has special risks including the possible illiquidity of underlying properties, credit risk, interest rate fluctuations and the impact of varied economic conditions.

Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. Municipal bonds are subject to credit risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income.

Wells Fargo Investment Institute, Inc. (WFII) is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

Our firm does not provide legal or tax advice.

Opinions represent WFII’s’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. WFII does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon.