Our readers often ask me to share my best tips for building good habits of investing. In this article, I’ll share the five investing habits which will serve you well for your investing career.
The 5 investing habits:
- Don’t look
- Rebalance annually
- Invest like a robot
- View dips as a buying opportunity
- Aim to pay zero fees
Investing habit 1: don’t look
To act like a real investment pro, ignore your investments.
Any new investor will find it difficult to resist checking the value of their best stockbroker account every day, or even more frequently. It’s genuinely very addictive. The act of logging into a stockbroker account provides a similar dopamine hit to spinning a slot machine reel. You don’t know whether it’ll be good news or bad, but there’s a chance that the value will have increased significantly and that’s an exciting prospect. In this sense, investing is not unlike gambling at all.
A healthy habit is doing the opposite; checking the value of your account as little as possible – fortnightly or monthly feels like a sensible balance.
Why is this? Well, constantly checking your investment portfolio value creates a useless stream of good and bad news which can make investing feel like a tense or even stressful activity.
Consider a portfolio that rises by 3%, falls by 5% then recovers back to its starting point all within the space of a week. If you stuck to a fortnightly login, you would not have ridden this drama by its coat-tails. But for those daily checkers, this would have been a distracting adventure with all the worry and self-doubt that you didn’t invest in the best companies or the best funds that comes along with a temporary fall in the market.
Take a long view, consistent with your overall investment objectives. You are investing for growth in your portfolio over a 5 year period, not a 5 day period.
Remaining too close to the daily ‘noise’ of the stock market could also encourage you to react to events in a way that is inconsistent with your investment goals. For example, if you witnessed shares surging by 4% in a single day, you may instinctively feel that you have ridden the market to a temporary peak and feel the need to sell your shares to escape any eventual fall.
Buying and selling on the basis of short term price history is known as technical analysis (see books), but in reality, your trades will be mostly based on a gut feel such as ‘This market has risen too much for this to continue to be a great investment, I now fear making a loss on my investments.’
But once you sell… what now? You are no longer invested and the longer you are out of the market, the lower your expected returns will be. What happens if the market continues to rise? Will you have the courage to bite the bullet and reinvest at a higher price and soak up the cost of your decision, or will you remain stubbornly out of the market for an extended period, completely contrary to your original goals?
The example above is a common mistake of new investors and is easily avoided if you keep a healthy distance from your account.
Investing habit 2: rebalance annually
If you have settled on a portfolio asset allocation of 40% bonds, 60% equities, then stick to it.
If you do nothing, the actual percentage of your portfolio taken by each asset class will fluctuate based upon their relative performance. This will skew your allocation and also the level of risk.
If corporate bonds surge in value by 50%, a moderate 40% allocation could swell to 60% of your portfolio. In this scenario, a good habit is to keep this in check by selling some of your bonds and buying equities to redistribute the portfolio value according to your original desired allocation target.
This is a good habit to ensure that your portfolio doesn’t grow arms and legs and run away from your original plans.
Without necessarily being ‘active investing’, portfolio rebalancing has the positive side-effect of allowing you to sell asset classes that have had a good year and buy asset classes that have had a bad year. This subtly invokes a bit of market timing, which studies have shown add a performance premium to investment portfolios that are rebalanced over the long term.
Investing habit 3: invest like a robot
Investing like a robot means designing a regular investment plan which you can carry out each month without thinking.
- No investments made on a whim, or in response to a new product launch
- Sticking to a target asset allocation
- Investing regularly throughout bullish and bearish periods regardless
Why this habit works:
- It enforces dollar-cost averaging
- It encourages frequent investment which keeps you in the market rather than in cash
- It allows you to ignore distractions such as news & emotional sentiment.
What does a good robotic plan look like? If you’re a good saver then you’ll have a clear idea of how much disposable income you’ll be saving each month. You’ll want to keep some savings in cash for emergencies, short term spending (like holidays and cars) and therefore not all of your disposable income should be earmarked for your stocks & shares ISA.
With a realistic sum in mind, you could set up a regular investment plan with your broker. The advantage of such deals is lower investing costs, which can sometimes be as low as £1.95 per share trade.
A robot plan doesn’t have to be particularly ambitious. You could invest a small sum of money each month, such as £100. Every little helps, and this will no doubt lead to greater things when you have the financial firepower to do so later in life. Not everyone can afford to invest £1,000 each month.
Investing habit 4: view dips as a buying opportunity
When global stock markets rout more than 30%, investors are usually in disarray.
Many will have sold their holdings in a fit of panic. Some are bracing for further losses. Nobody feels in the mood to open their purse or wallet and invest further… or do they?
Take a closer look at discussion forums and you’ll see a flurry of speculation on when is the best moment to buy.
In the grand scheme of stock markets, dips are the ultimate buying opportunity. In the game of buying low and selling high, a crash should come as a relief for long term investors. It finally provides the opportunity to buy shares at a bargain price!
It sounds a bit counter-intuitive, but a crash in prices is worth crossing your fingers for if you’re a long term saver.
If given the choice, which of the following scenarios would you prefer to play out:
- A low and sullen stock market for most of your life, ended by a dramatic rise
- A gradually rising stock market that coasts upwards to end at the same value
If both end at a similar index level, you would surely prefer the price pattern that allows you to keep buying and buying at relatively low prices for most of your saving life.
Sure, a gradually rising market would provide you with immediate profits and a great-looking brokerage account balance, but you would ultimately see less and less upside as you buy at increasingly inflated prices.
Of course, this is just a thought experiment and neither scenario will play out in reality. But this should illustrate the fact that on paper, investors want and need crashes to be able to buy cheaply.
Investing habit 5: Aim to pay zero fees
When investing in shares, you’ll have many routes, platforms & products to choose from.
Most of these routes will involve you paying transaction fees (also known as trading commissions or dealing fees), as well as management or administration charges periodically.
This can lead to fee fatigue – the acceptance that you’ll have to pay several fees regardless of which provider you choose, and therefore you begin to compare stockbrokers on their other merits.
But this is a fallacy. Our guide to avoiding investing costs will help you find options that can reduce fees to close to 0%. Any fees you pay are a cash loss to your portfolio. To maximise performance, you should adopt the presumption that you can find a virtually zero-cost investing approach if you look hard enough.