Successful investors vet investments and never 'follow the crowd' | The Rational Investor

© Provided Robert Stepleman

One book that I read long ago and that has influenced me is titled, “The 7 Habits of Highly Effective People.” Written by Stephen R. Covey and first published in 1989, it espouses the view that to be effective requires a change in mindset; that is, people must be prepared to change the way they look at things. The same thing is true of investors. To be successful they may have to look at investing in a way that is quite different than their current way.

Any investor can be lucky once or twice, in line with the saying, “even a stopped clock is right twice a day.” However, being a consistently successful requires more than luck. It requires a way of looking at investing that’s better than the “crowd.” This can pay off as the crowd significantly underperforms the market. For example, according to the research firm Dalbar, over the last 30 years the crowd generated a return of 7.1% while the S&P 500 generated a return of 10.7%.

One of the most important habits of successful investors is deciding on their asset allocation before they make any investments. Studies show this decision is the dominant factor that determines an investor’s returns. One study suggests as much as 92% of an investor’s return can be explained by this decision.

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Successful investors avoid market timing; that is, jumping in and out of the market trying to predict the market’s shorter-term direction. Other research by Dalbar supports the futility of this tactic. Additionally, research by Mark Hulbert shows over the long-term that an 80% stock and 20% bond portfolio would’ve earned a higher return than market timers with less risk.

Successful investors carefully vet investments and don’t “follow the crowd.” They don’t “hop on the bandwagon” by buying bitcoin or the latest meme stock. Doing that usually results in poor results because by the time that a typical investor buys such investments, their prices have already spiked, and any “easy money” has been made.

Successful investors ask first, “How much money can I lose?” not “How much money can I make?” They understand simple mathematics. If an investment goes down 50% then to fully recover it must go up 100%.

Successful investors know risk and return are closely linked and it’s critical to make sure any investment has a return that fully compensates for its risk. For example, 10-year U.S. Treasury securities were recently paying about 4% and are fully Federally taxable. The market is forecasting (rather hopefully) that inflation over the next 10 years, now at 8.2%, will average an annualized 2.4%. Additionally, as interest Warates are rising, not holding these to maturity could result in a loss of principal. For many investors, this analysis would imply the return is not worth the risk.

Successful investors factor their tax situation into their investment strategy. Investors that ignore taxes will likely see lower after-tax returns. This means that, at least under current law, investors need to hold the proper assets in their taxable and tax-deferred accounts. For example, taxable bonds should be in a tax-deferred account and “qualified” dividend stocks in a taxable account.

All data and forecasts are for illustrative purposes only and not an inducement to buy or sell any security. Past performance is not indicative of future results. If you have a financial issue that you would like to see discussed in this column or have other comments or questions, Robert Stepleman can be reached c/o Dow Wealth Management, 8205 Nature’s Way, Lakewood Ranch, FL 34202 or at He offers advisory services through Bolton Global Asset Management, an SEC-registered investment adviser and is associated Dow Wealth Management, LLC.

This article originally appeared on Sarasota Herald-Tribune: Successful investors vet investments and never ‘follow the crowd’ | The Rational Investor

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