Invest like the best: Essential habits of highly successful investors

Being a successful investor often sounds simple, but that doesn’t mean it’s easy. Still, investing is the best way to build wealth over your lifetime and ensure that you’re able to live the life you want to live. So it can make sense to learn from the best investors to supercharge your investing gains and avoid some of the mistakes that can derail your portfolio.

Here are some habits of successful investors that you can implement in your own life and make it more likely that you’ll achieve your investing goals.

7 habits of successful investors

1. Start with saving

It may sound boring, but before you start investing you’ll need to start saving. Consistently spending less than you earn means you’ll actually have money around to invest. You can even make saving automatic, so you don’t have to think about it each month.

If you contribute to your employer’s retirement plan, such as through a 401(k) or 403(b) plan, you are already participating in an automatic saving plan. These retirement plans are a great way to start investing because you can make contributions directly out of your paycheck and may even get an employer match, which is essentially free money.

Once you’ve established an emergency fund, you can use additional savings to invest toward your financial goals.

2. Develop a plan

One of the best things you can do to keep you on track to meet your financial goals is to develop an overall plan. You’ll want to think through your short-term and long-term goals and then invest based on those goals.

It may be helpful to work with a financial advisor who can help you with identifying goals, understanding your risk tolerance and developing an overall strategy. Once you have a road map in place, it can make the investing journey easier to navigate.

3. Have a long-term mindset

Investors today face a barrage of market news and commentary, most of which is focused on what’s going to happen in the next day or week. It’s easy to see why the average holding period for U.S. stocks was just 10 months in 2022, down from about 5 years in the 1970s, according to an analysis by broker eToro.

With this increase in short-term thinking, it’s actually an advantage to do the opposite: think long-term. Having a long-term mindset means that you understand there will be ups and downs in your portfolio and that you don’t react emotionally when periods of volatility occur. Long-term investors understand that stocks represent ownership interests in actual businesses whose value will rise or fall over time based on the company’s performance.

Charlie Munger, the long-time vice chairman at Berkshire Hathaway who died in 2023, was a proponent of long-term thinking and the power of compounding. “Investing is where you find a few great companies and then sit on your ass,” he once said.

4. Treat downturns as opportunities

One way to think long-term is to mentally prepare yourself for the inevitable downturns, so that you treat them as opportunities when they arrive. Bear markets are a normal part of investing, but when they happen they can be unnerving for investors. The economic news is typically bad and you may have plenty of reasons to think it’s a good time to sell, but downturns are often when the greatest opportunities for long-term gains arise.

Studies have shown that investors who invest during market downturns are significantly better off over the long-term than investors who sell or just maintain their current holdings. As legendary investor Warren Buffett is fond of saying, “Be fearful when others are greedy, and be greedy when others are fearful.”

5. Diversify your portfolio

“Diversification is a safety factor that is essential because we should be humble enough to admit we can be wrong,” according to Sir John Templeton, a legendary global investor.

Most investors will want to hold a diversified portfolio to protect themselves from the risk of having all their eggs in one basket. Being diversified means holding a broad selection of stocks across industries and market capitalizations. You’ll also want to think about how to diversify across different types of assets, such as stocks, bonds, cash and alternative investments such as real estate.

Being diversified may not lead to the highest returns, but you may end up doing better if it leads to less volatility and fewer chances to make emotional decisions in your portfolio.

Here are some tips for how to diversify your portfolio.

6. Pay attention to costs

“The record could hardly be clearer: The more the managers and brokers take, the less the investors make,” the late Vanguard founder John Bogle wrote.

All investors should pay attention to the various costs associated with their investments. These costs may come in the form of account fees at certain brokers or fund fees for owning ETFs or mutual funds. These costs may seem small, often expressed as a percentage of your investment, but just a one percent annual fee can have a major impact on your investments over a multi-decade timeframe.

Investing in low-cost index funds is one way to help your portfolio costs stay low. These funds typically charge less than 0.10 percent annually, ensuring that more of the return goes to you instead of the fund manager. If you’re working with a financial advisor, be sure you understand their fee structure and the costs associated with the investments they put you in.

7. Consider taxes

Investors sometimes forget about the tax impacts of certain investments, but it’s something important to keep in mind. You will owe taxes on any capital gains or income realized in taxable accounts, such as a brokerage account. However, tax-advantaged accounts allow you to defer or eliminate taxes altogether.

Retirement accounts such as IRAs and 401(k)s allow your contributions to be invested and grow tax-free until you start making withdrawals during retirement. This means that you can realize investment gains and receive dividend or interest income along the way without having to worry about paying taxes.

In Roth accounts, the tax advantage is even greater. Your contributions are made with after-tax dollars, but withdrawals during retirement are tax-free. Pay attention to where you hold certain investments so you can minimize the taxes you have to pay.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.