3 habits of long-term investors
Develop these behaviours to help build lasting wealth.
At Morningstar, we’re proponents of long-term investing. We don’t believe (and have the research to back us) that short-term investing and day trading is a sustainable way to build wealth. There are no ‘secrets’ to building wealth, but there are habits that are kept over long time periods that make a meaningful difference to your outcomes.
Your outcomes are influenced by the securities that you pick, but they are more about the consistent behaviours that you maintain. Here are three habits backed by Morningstar data and research that will help you build wealth over the long term.
1. Stay the course
It sounds counterintuitive, but one of the most powerful mindsets that an investor can have is being okay with doing nothing. Sitting tight in the face of volatile markets and your own nerves is difficult but valuable. Going to a barbeque and hearing about the next best investment and being able to keep the fingers away from the trading app. Investing is an unusual endeavour in that effort and outcome aren’t correlated. That might sound counterintuitive, but it’s rooted in behavioural research.
Morningstar’s Mind the Gap study highlights the persistent performance penalty individual investors suffer when they try to time the market. The latest version of the study shows that investors trail fund returns by 1.6% p.a., because investors are chasing after investment returns.
Long-term investors understand that over decades in the market, they will inevitably experience market volatility. They stay invested through downturns, knowing that they’ll come out of the downturn on top.
Over the last 30 years, if you miss the S&P 500’s 10 best days, your return would be cut in half. If you miss the best 30 days over the last 30 years, your returns will be 83% lower. This is why timing the market is an issue, but also why long-term investors know that switching in and out of investments might mean missing out on the days that will make up the majority of their overall return. Not being invested means missing most of those days, as 78% of the best days occurred in a bear market.
The lesson is that having a plan and having the guts to stick to it will improve your outcomes more than having the occasional brilliant stock idea.
2. Automate your wealth creation
Your brokerage account can be your friend or your foe. Many brokerage apps make it incredibly easy to trade frequently. It’s in their best interest because that’s how they make money, but it’s not in yours. However, there are some helpful features for investors.
Additional investment can be automated across almost all brokers, trading and investment platforms. Successful long-term investors use these features to their advantage.
A popular trend in budgeting is to ‘pay yourself first’. The concept ensures that you have your investments taken care of before you give yourself discretionary funds. This treats investing like a compulsory bill and not an ad-hoc activity when you have extra money.
Have the funds in your bank account and regularly invest a set amount. This can also prevent poor behaviour that comes with trying to tactically allocate and time the market. Behaviour that long-term investors want to avoid is keeping their funds in cash, always waiting for a ‘better time’ to invest. Use time to your advantage to compound your investment, instead of stressing about something that is out of your control – the movements of the market.
The practice of regularly investing at set intervals is Dollar Cost Averaging (DCA). This is an investment strategy that comes with its own advantages. Investing small parcels over a long time period reduces the risk that you invest at an unattractive price. Long-term investors who utilise this strategy for wealth creation ensure that they pay special attention to transaction costs. Investing frequently but with high costs can be detrimental to your financial goals. Find products and services that either have low or no transaction costs.
3. Simplify your portfolio
Investing in esoteric and exotic investments does not make you a sophisticated investor. Having a complex portfolio can be fun for investors that enjoy the art of investing and the thrill of ‘exciting investments’. However, simple portfolios tend to be more successful.
In Morningstar’s Target Date Fund analysis, the simplest portfolios that maintained steady diversification and adjusted with age often outperformed more active, hands-on strategies over the long-term, especially when accounting for fees and taxes.
Successful long-term investors focus on a core principle – holding assets that have a direct connection to their investment strategy. Their investment strategy in turn has a direct connection to achieving their financial goals.
Simple portfolios make it easier to make these connections which has behavioural benefits as well. During market volatility or uncertainty, you will have more confidence in your investments and their purpose in your portfolio. This makes it less likely that you will switch in and out of investments because you have lost faith in them.
I try to keep my portfolio as simple as possible. 2 reviews a year, 6-7 investments that have a direct connection to my financial goals, low fees and low transaction costs. Invest in set intervals, rain, hail or shine. Not only does the data back this simple approach, it also means that I have peace of mind and I’m not always focusing on finding the next best opportunity. That works for me as I’m not a hobbyist investor – my portfolio is purely a vehicle to help me achieve my financial goals.
Final thoughts
Long-term investing is not about predicting the next best thing, it is about preparation. Developing healthy habits with your portfolio will pay dividends – literally.
Invest Your Way
For the past five years, Mark and I have released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.
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