Do you have the skills needed to be a successful investor? What’s required for a successful investing experience?
Most of the investing skills you need relate to what you can control versus what you can't control.
You can control your behavior, your comprehension of risk, and your aspirations. You can’t control the market, how others are investing, or luck.
What You Need for Investing Success
Let’s look at three necessary capabilities for being a successful investor:
- Fully understanding what game you're playing. Your best friend, work colleague, or neighbor is probably playing a different investment game with different rules and different time horizons. Don’t pay attention to what others are doing. Instead, focus on what specific financial goals you are trying to achieve. The lens through which you see the world may be dissimilar from others. That’s okay, others are just playing a different game.
- Avoid self-sabotage. Many investors fall into the emotionally comforting trap of trying to time the market or select the best stocks. Those are forms of self-sabotage because your chance of success at these activities is small. Another related form of self-sabotage is bad financial behavior. The best financial planning strategy on the planet can’t overcome bad behavior.
- No FOMO (Fear Of Missing Out). Fear of regret is part of the human condition. You want to be in the flow and not miss out on opportunities. However, many investments that are in favor today may be out of favor tomorrow. Fads come and go. Your long-term planning goals should not be dependent upon missing out on strategies that aren’t suitable or appropriate for your particular financial situation.
All of these skills require a mindset centered on your goals above everything else. Daily distractions and noise don’t interfere if you develop this mindset. The core of all three skills is focused on fostering a calm behavioral and emotional state of being. Poor decisions are often made when you are overly emotional, ignore the real facts, and forget your goals.
Why Your Perception of Risk Matters
Understanding how risk impacts your investment decisions is at the core of the skills needed for being a successful investor. Author Morgan Housel says, “There are things that can happen in the world that are outside of your control that have a bigger influence on outcomes than anything you did intentionally.”
Professor Ken French defines risk as “uncertainty about lifetime consumption.” Your lifetime consumption includes necessary items like housing, food, and medical care. It might also include bequests, gifts, and charitable donations.
Since you can never know precisely what your consumption will be over your lifetime, you have to make decisions along the way based on imperfect information. Your objective is to invest based on your current aspirations and what you know today.
Good investment skills don’t guarantee that you have good investment outcomes, but they help. Chance or luck has a big role in determining actual long-term investment returns. You can’t control luck, but you can control how you behave and react to risk. Start there. Ready for a real conversation?