If you want to be an investor, you must develop the right mindset, which is a way of thinking that transforms your habits into different behaviours that propel you further to investing success.
Spending habits
Learning habits
Investing habits
Spending Habits
Every person has two identities. An 'Investor' self who lives and spends in your future, and a 'Spending' self who lives, earns and spends in your past/present.
Financially successful people devote more attention to the future Investor than they do to the Spending self.
As investors, we consider that every dollar spent today will impact our future selves. This is because money spent today could have been invested, and the opportunity cost of not investing is deducted from the future accumulation of funds. Therefore, it's essential to make wise investment decisions and consider the long-term impact of spending your money today.
If you earn an average return of 10% on your investments (average return for the Stock market), it will double every seven years, which means after 21 years, every dollar you invest would turn into $8.
Let's do a real-world example:
So imagine I need to buy a car, so I spend $20,000 on a new car. That opportunity cost cascades into the future as follows:
Years in the future | Opportunity cost (10% yearly return) |
|---|---|
7 years | $38,975 |
21 Years | $148,000 |
28 Years | $288,420 |
35 Years | $562,050 |
42 Years | $1,095,270 |
Understanding the actual cost of things
In other words, the opportunity lost by not investing the $20,000 (which I spent on my new car) would cost me over one million dollars in lost value after 42 years. You can imagine the younger you are, the larger the impact will be. That's why it's so important to invest in your future first, then spend on your past what is left over.
Learning Habits of a Wise Investor
Financial publications
Subscribe to at least two reliable financial information sources and read at least one article from each of them daily. This will help keep you up to date on current market movements and general trends. If you are investing, it helps to know what's going on in the economy to anticipate any impacts on your portfolio.
Books
The best thing about books is the amount of research that goes into them. You can get a huge amount of value in a small package. Over the last few decades, there have been some fantastic books written on the subject of investing and market analysis.
Below are some of the best strategy development books I've seen.
Investing Habits
Idle money
Leaving money in the bank is a big no-no for me. This is because, after taxes, fees and inflation, any interest you earn from the bank would not even allow me to break even. Therefore, I am always putting money to work regularly. If you want to be successful long-term as an investor, always find ways to put your cash to work (as safely as possible).
Test before you invest
Whenever I am working on a new strategy, I always test it with a sandbox or a small investment. This helps to manage my risk. This way, if my new strategy misses the mark, it won't impact my portfolio too heavily.
Establish portfolio rules
Wise investors have rules around their market investments, for example, minimum diversification requirements, entry and exit conditions, and size allocations for their investments.
Investment drivers
It's essential to have a logical reason behind every purchase you make. Relying on luck alone is never a wise strategy. Understanding the drivers that impact your investments is key to knowing when to enter or exit the market. By studying these drivers, you'll gain valuable insights that can help guide your investment decisions.
Invest regularly and early
Investing should be seen as a way of life rather than a one-time task. To achieve financial success, it is vital to incorporate investing into all your decision-making and regularly dedicate time to it. However, if you do not wish to put in the effort and time, investing in a managed fund where a professional takes care of the work may be a better option for you.
The most important thing is to start as early as possible. By investing carefully over a longer timeframe, you can take advantage of the exponential growth component of growing your investment. If you're interested in learning more about preparing for retirement and long-term investing, the team at retireguide.com have produced an outstanding article covering this in significant depth.
Never Lose Your Capital
When unexpected events occur, I make sure to stay grounded in reality by considering how much risk I am willing to take on. I believe it's wise to focus not solely on potential gains, but also on preventing potential losses. Although I hope for the best, I always prepare for the worst.
To avoid losing my capital on a bad investment, it's crucial to consider potential losses before investing. For example, Netflix lost 76% of its value between 2021 and 2022. To recover from such a loss, I would need a staggering ROI (a return on investment) of 328%! The more I lose in a bad investment, the more difficult it is to recoup my losses.
Therefore, it's always better to take risk mitigation measures, even if it means sacrificing some potential gains. This is why I prioritize preventing losses in the first place, as recovering from a loss is much more challenging.
In summary
Consider what you're spending now and how much you would be 'giving up' in future gains. Invest in your future self first before spending on your past self. And before making a single investment, make sure to invest in your education first. Spend 10 minutes per day just being aware of what is going on and read books on how to manage your investments well and develop your strategies.
When investing, always consider the three-step approach:
Test before you invest
Define your drivers
Never lose your shirt!
Happy investing!
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