What makes a good investor? In addition to a strong knowledge of the economy and market, wisdom, patience, and an understanding of a few core principles go a long way. Here are five such principles most good investors know.
5 principles most good investors know
1. All investment strategies work some of the time, and no investment strategy works all the time.
Good investors understand that investing is flexible and multifaceted. What works in today’s market might not work in other market conditions. Maintaining a pulse on the market and economy and holding a well-diversified portfolio is wise.
At Credent, this principle is a core belief, and we’ve built a multi-strategy approach encompassing nearly 20 distinct strategies tied to global equity market participation, deliberately targeting unique market segments.
2. Just because a market or economic event seems “good” or “bad” doesn’t mean it is.
Good investors understand the nuance of the economy and market, maintaining a big-picture point of view. This is wise, as some “good” economic or market indicators are a warning, while seemingly “bad” ones may be an encouraging sign.
For example, in our May 2024 article on “4 Reasons Not to be Alarmed by an Anticipated Economic Slowdown,” our Investment Policy Committee discussed the slowing labor market as a positive reaction to the Federal Reserve’s intentional actions to slow the economy.
On the other hand, in their discussion around highly concentrated returns in the S&P 500, the committee noted, “Chasing performance from the top names may lead to an unnecessary and potentially destructive risk profile.” At Credent, avoiding this overconcentration helped us navigate the volatility in these stocks.
Good investors can see what others can’t – the opportunities and the cautions – because they maintain a broad perspective.
3. Volatility is normal.
In investing, there will be volatility.
As stated in a recent article, “Volatility can seem scary or sudden and cause investors to believe the worst. With an accurate context for volatility and a well-structured portfolio, there is no need for outsized concern.”
In April 2024, for example, we traced market fluctuations to inflation, interest rates, and geopolitical tensions. In August 2024, volatility stemmed from a normalizing economy, indices biased towards a handful of mega-cap tech stocks, and increasing interest rates in Japan.
Additionally, ups and downs occur because of the economic data disconnect, where the gap between what economists predict and what actually happens creates discord in the market.
Good investors know the market is reactive and understand how reactivity creates short-term volatility. Nonetheless, they remain consistent, refusing to let natural market fluctuations lead to rash decisions that will cost them in the long run. Often, they even use volatility to their advantage through strategies like tax-loss harvesting.
4. Investing is a long game, not a guessing game.
Good investors ride market volatility with peace and patience, knowing that investing is a long game, not a guessing game.
In a commentary on “Time in the Market,” our Investment Policy Committee shares, “History shows that investors who acknowledge the fact that downturns are an inevitable part of investing, look beyond short-term volatility, and remain invested have a greater chance of achieving long-term goals… Simply put, time in the market is more important than timing the market.”
When volatility creates feelings of instability and economic events strain portfolios, good investors know to wait out the market instead of putting their returns in jeopardy by jumping in and out of the market.
5. The market has weathered geopolitical events before.
As discussed in reports from the last year on the potential government shutdown, the Hamas incursion against Israel, and the Federal Reserve’s actions against inflation, geopolitical events, while often outside an investor’s control, can impact the market.
However, history suggests that investors who acknowledge that volatility is an inevitable part of investing also look beyond the short-term noise of political and geopolitical events.
That’s because, while heightened equity market volatility may occur in the near term due to these events, the lasting impact on stocks has historically been absent.
Being aware and responding wisely to current events is important, but staying consistent is also important. An unreasonable reaction will only create problems. The simple act of remaining invested has a greater chance of achieving long-term success.
With a strong team of investment experts managing your portfolio and executing tactical changes when necessary, you don’t have to worry that what’s happening in the government or across the globe will stop you from reaching your financial goals.
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