By Jeff Headrick, Financial Planner
In this week’s blog I’m going to discuss four principles of the successful investor. They are as follows:
#1. The Principle of Learning
#2. The Principle of Pleasure
#3. The Principle of Decision
#4. The Principle of Help
The Principal of Learning
I have been an investment professional for many years now. While I was unfortunate to be in the financial planning business when the Twin Towers fell in 2001 and when the Great Recession began in 2008--in some ways I was fortunate. You see, as a man of faith I can attest that God often takes burdensome short-term events, and uses them as a form of seed for future growth. It’s in the winter that the roots grow the deepest.
I typically brainstorm for about a week before I begin a new post. There are so many things to write about and I try hard to be relevant. My original idea for this week’s post was to write about the importance of a long-term investment philosophy. I also wanted to write about how peace can be added to your life with such a view. This is especially the case if you are on the precipice of retirement, and the market is throwing a tantrum as it has in recent weeks.
As I began charting the ideas for this post, I wanted to include a graph or two to add some validity to my thoughts. In about 15 minutes I entered some ticker symbols that I use in my client’s portfolios, compared them to a benchmark index (the S&P 500), and then charted them over three different periods of time.
Short-Term View of the Stock Market
Mid to Long-Term View of the Stock Market
You see, after a lot of study and learning, I now know how to find calm in a raging sea. I find calm by slowing down, performing analysis, and studying what I have found. But as I was doing this charting, one thought kept popping through my head: “What if everybody knew how to do this?”
And that’s when it hit me. While some people seek out advice from professionals who can do this for them, many people do not. And whether you use a financial professional or not, shouldn’t just about anybody in this day and age be able to turn on her computer and spend 15 minutes entering her own investments in order to compare them to a relevant benchmark?
But what I take for granted is that most people do not know how to do this. And even if they did, they may not be able to fully grasp what it means— and therefore get the piece and confidence that should be derived from such an exercise. So instead of simply writing about a long-term investment philosophy, I decided to write about four principles a successful investor might consider in order to develop that long-term view.
The first principle for the successful investor is the principle of learning. If you want to be successful investing, you’re going to have to do some homework. And in the nature of full disclosure, you should probably do a lot of it. Just like any other field of study, the landscape is constantly changing, and a true student changes the way he learns to coexist.
If you want to be a successful investor start by clearing out your mind from what you think you know, and just begin as a new as a student of the market, the economy, and asset allocation.
The Principle of Pleasure
The next principle is the principle of pleasure. I have seen few people who were truly great at what they do, that did not enjoy what they were doing. Whether you’re a professional football player, a schoolteacher, or a bricklayer, if you are really good at what you are doing, you probably enjoy doing it.
Investing is no different. If you are going to make your own investment decisions, they should be well-informed. In my experience, most savvy nonprofessionals I have met through the years truly enjoy studying the stock market and investments. Maybe it’s just a hobby, maybe they realize how important stewardship is, or maybe it’s both. But most successful investors take pleasure in both the learning and the doing of investing.
It’s worthy of note here that in order to work with an investment professional such as a financial planner or a financial advisor, you don’t necessarily have to put in as much study as someone who does not work with a professional. In addition, I have worked with many faithful delegators over the years that absolutely disdain investing. And that’s perfectly okay, so long as you are working with a professional who does derive pleasure from pursuing that perfect portfolio.
Are we in agreement so far?
The Principle of Decision
The third principle is the principle of decision. There are so many investment philosophies out there to choose from. Do you like value stocks or growth stocks? Are you a passive investor or an active investor? Do you believe in a well-diversified portfolio or do you simply load up with aggressive equities positions and roll the dice?
Any of the styles above may work for you at a given point in time. But that’s not the question. The question is, which one are you going to subscribe to? Which one of these investment styles are you going to form convictions upon, and then make a reality?
I know for me the principle of decision came around 2005 and 2006 when I had grown weary of reading books by William Bernstein and Richard Ferri. I had attended Certified Financial Planner investment courses at the University of Tennessee at around the same time. In addition, I had been utilizing multiple software systems that advocated their own investment style. My point here is that either my brain was going to explode via information overload, or I was going to have to take a deep breath and make a decision about the style of investing I was to go forward with at that point in time.
What I was going through is also known as analysis paralysis. We can read so much and study so hard, but in the end, we have to make a decision.
After you have done your homework and studied the science and art of investing, you have to make a decision as to how you are going to implement what you have learned. And even if you do a lot of homework and enjoy the process, you may still find that pulling the trigger on your own portfolio design and construction can be a little overwhelming.
If you make it through the principle of learning and the principle of pleasure but find yourself getting stuck on the principle of decision--not to worry. This may be an opportunity for you to seek guidance from an investment professional such as a financial planner or financial advisor. Together, you and your advisor may very well be able to come up with a grand plan to optimally manage your investment portfolio.
I find calm by slowing down, performing analysis, and studying what I have found. But as I was doing this charting, one thought kept popping through my head: “What if everybody knew how to do this?”
The Principle of Help
This final principle can be tricky for some. While I do meet a layperson now and again that has had success with a do-it-yourself approach to investing, most of the time this success has not been during an elongated bear market. And if it was, most of these people were in the accumulation phase of planning.
Managing a portfolio during the accumulation phase can be deceiving because during this phase you are pumping new money into the account on a regular basis. For example, you may have a portfolio that’s worth $250,000, and it doesn’t seem like it’s affected much by a drop in the stock market. However, what you may have failed to factor into the equation is the fact that you may be contributing anywhere from $10,000-$20,000 or more annually into this account.
New money inflows like this can smooth out stock market corrections quite nicely. But when you are in full-blown retirement you will not have the luxury of this positive effect. Make sense?
Whether you have had success as a layperson or not, always be open to the principle of help. Even as an investment professional, I rely heavily on constant input from my peers to maintain a purity and humility with my investing.
During the bear market of 2008, for example, I probably spent as much time talking to my peers about what to do as I did to my clients. And I let my clients know it. I let them know that I did not have all the answers, but that I was seeking out advice and second opinions from those who had seen markets like this before. It’s amazing the piece that asking for help can truly bring.
If you mastered the principle of learning, pleasure, and decision, don’t ruin this success by letting your ego get the best of you. Always be humble enough to ask for help.
To be a successful investor, it will probably take more than just the four principles mentioned here in this post. However, based on my experience I can’t think of a better place to start than these four. If you are interested, I would be more than willing to hear your thoughts on the subject. You can always reach me in North Carolina at (910)448-1450, or in Tennessee at (865)604-2846. Whether you are an investment professional like me, or a layperson with a passion for building a quality portfolio, please don’t keep your thoughts to yourself. We can all learn from one another.
About the Author
Jeff Headrick is an independent FEE-ONLY financial planner and wealth manager with Inspire Financial Planning. When Jeff was still in his teens his father died unexpectedly. While his father was a hard worker and a good provider, he did not have the best financial plan in place when he died. This personal experience, coupled with being inspired by Sir John Templeton, Warren Buffett, Dave Ramsey, and the laws of compound interest, prompted Jeff to enter the financial services industry in 1999. He has been helping people with their financial planning ever since.
Jeff lives in Wilmington, NC with his wife and two children. He spends most of his spare time just across the Intracoastal Waterway in Wrightsville Beach, enjoying the beauty of the NC Coast.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The information presented does not constitute financial, legal or tax advice and should be used for informational purposes only. Since individual circumstances vary, you should consult your legal, tax, or financial advisors for specific information.
Investing involves risk including the potential loss of principal.
No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification does not guarantee profit nor is it guaranteed to protect assets. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. You cannot invest directly in an index. Consult your financial professional before making any investment decision.
Investment Advisory Services offered through AlphaStar Capital Management, LLC a SEC Registered Investment Adviser. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the adviser has attained a particular level of skill or ability. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Consult your financial professional before making any investment decision. Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.
These are the views of Inspire Financial Planning and not necessarily those of AlphaStar Capital Management, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your financial advisor for further information.