SIX HABITS OF SUCCESSFUL INVESTORS- PART TWO
When the value of your investments falls, it's only human to want to run for shelter. But the best investors don’t. Instead, they maintain an allocation to stocks they can live with in good markets and bad.
The financial crisis of late 2008 and early 2009 when stocks dropped nearly 50% might have seemed a good time to run for safety in cash. But a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during that time were far better off than those who headed for the sidelines.
From June of 2008 through the end of 2017, those who stayed invested saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%. That's twice the average 74% return for those who fled stocks during the fourth quarter of 2008 or first quarter of 2009. While most investors did not make any changes during the market downturn, those who did made a fateful decision with a lasting impact. More than 25% of those who sold out of stocks never got back into the market and missed the gains that followed.
If you get anxious when the stock market drops, remember that’s a normal response to volatility. It’s important to stick with your long-term investment mix and to have enough growth potential to achieve your goals. If you can’t tolerate the ups and downs of your portfolio, consider a less volatile mix of investments that you can stick with.
Savvy investors know they can't control the market, but they can control costs. A study by independent research company Morningstar® found that, while by no means guaranteed, funds with lower expense ratios have historically had a higher probability of outperforming other funds in their category—in terms of relative total return, and future risk-adjusted return ratings.
Another habit that may help investors succeed is keeping an eye on taxes and account types.
Accounts that offer tax benefits have the potential to help generate higher after-tax returns. This is what investors call "account location"—the amount of money you put into different types of accounts should be based on each account’s respective tax treatment. A related concept is called "asset location"—the practice of putting different types of investments in various types accounts, based on the tax efficiency of the investment and the tax treatment of the type of account.
While taxes alone should never drive your investment decisions, you may want to consider putting your least tax-efficient investments (for example, taxable bonds whose interest payments are taxed at relatively high ordinary income tax rates). Meanwhile, more tax-efficient investments are usually more suitable for taxable accounts.
Investing can be complex, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and be aware of taxes, you will have adopted some of the key traits that may lead to success.
SOURCE: FIDELITY VIEWPOINTS