Superbowl 50 & 10 Habits of Successful Investors

by Brian C. Beasley

Vegas Shocked! Broncos Defeat Panthers!!

The Denver Broncos' victory in Superbowl 50 was a surprise to many. After all, Cam Newton's Panthers finished the season with an impressive 15-1 record, compared to the Broncos' 12-4. Payton Manning was coming off a foot injury that sidelined him late in the regular season. Newton is 13 years younger, stronger, and faster. So what happened?

Ultimately, I believe that the Broncos' were just more comfortable in the big game than their opponents from Carolina. It was Peyton Manning's fourth Superbowl, and his team's second attempt since his arrival. Both teams were extremely well prepared physically. They had practices all the good habits of championship teams. But when it counted, the Broncos' aggressive defense rattled the Carolina offense--especially young Cam Newton.

It's How You Think

How you think is a major factor in your success or failure in anything. Investing is no different. Contrary to popular belief, successful investors like Warren Buffet cannot tell the future! They live in the same world that you do. They have access to the same investment markets. They go through the same market ups and downs that everyone else does. They have the same 24 hours in a day. They even experience down years with their portfolios. (Warren's team at Berkshire Hathaway were down over 13% in 2015). So what's their secret? Hint: It's how they think and make decisions.

Certainly you could read all of Mr. Buffet's letters to his shareholders over the years. But their long term success (along with most other successful investors) boils down to some common habits and ways of thinking. In my 21 years of working with hundreds of investing families (through three bull and two major bear markets), I've observed at least ten of those habits. I'll try to summarize them for you. Here they are, in no particular order...

Habit #1: Use Qualified Experts

As good as Peyton Manning is, he wouldn't have a second ring without a team of experts helping him. Without the coaches, the team wouldn't play as smart as they could. Without John Elway's expertise in building the team around Payton, there would be no Superbowl 50 victory.

My brother, Corey, is a strength and conditioning expert in Southern California. He is recognized as a top trainer of some professional athletes. These professional athletes know how to exercise and train. But they hire him to (a) help them improve their results and (b) not get injured. It's not that the exercises and equipment only work if Corey is there. The clients just work better with Corey's guidance.

The same is true of successful investors. When an investor succeeds, it's almost always a team effort. Like most things, nobody can do it all. Expertise allows you to make smarter long term decisions that you would not make without help. Experts can open your eyes to opportunities and dangers you might otherwise miss. Experts can also be a massive time saver, providing clarity in a world that seems to be getting more and more murky. Qualified, disciplined advice can be invaluable to those who follow it.

Habit #2: Live Beneath Your Means

You can't grow a significant investment portfolio by spending all your money! It's really that simple. Pay your self first. Save and invest BEFORE you spend.

Back to Football...NFL Teams have budgets. They can't spend more than they make each year. In fact, outside of some government entities (no names, please!), most everyone has to follow this habit--or suffer the consequences.

Save and/or invest 10-20% of your income before taxes. Live on what is left. Probably not easy for many of you. But VERY simple.

If you are retired and depending on your portfolio for income, you can use this habit too! Simply spend less than your portfolio makes! For example, if your portfolio is returning 5%, and inflation is 2%, then spend 3% of your portfolio.

Habit #3: Commit to an Investment Policy Statement for at least five years.

Almost nobody does this. Excepts successful pension funds, mutual fund managers, and successful institutional investors. Pretty much anyone who succeeds in long term investing has a game plan that they follow consistently. NFL teams have playbooks each season. Pilots file flight plans. You should be no different.

Commit to a well thought-out plan for your investment strategy. And STICK TO IT! A good investment policy will address things like:

How much risk the portfolio can take (investment objective)
The primary purpose for the account (supplemental income, growth of capital)
How long will the portfolio be investing? 30 years? 30 months?
The types of investments that will be used (or avoided)
How often re-balancing should occur
Is the portfolio strategic (long term) or tactical (gets in and out)? If tactical, how are decisions made?

Habit #4: Diversify Appropriately

Diversification is commonly misunderstood. Many over-simplify this concept, thinking that owning multiple stock mutual funds means they are fully diversified. This is true to the extent that the risk of any one stock is reduced. However, in a declining stock market, all those funds tend to drop in value.

True diversification can involve more variables. Here are some of the various ways to diversify:

Stocks vs bonds vs cash.
Traditional investments vs alternative investments (real estate, hedge funds, commodities)
Domestic vs International
Developed Countries vs Emerging Countries
Floating Rate Bonds vs Fixed Rate Bonds vs Inflation Hedged Bonds

The idea is to make money over the long term on each investment, without having each investment go up or down each year together. True diversification seekto smooth out the bottom line performance, while still meeting your long term planning goals.

Habit #5: Invest Long Enough for the Averages to Show Up

Too many people give up on an investment at the wrong time. They sign up for the historical (or magical) 10% average return of the stock market. But in their first year (or three years), if they haven't averaged that 10%, they quit, fire their advisor, or change investment strategies. Want to know the truth? They probably quit at a time they should have been buying more.

Even successful long term strategies can seemingly lag for periods of up to three years at a time. It's part of long term investing. You can either accept it and take advantage, or keep spinning your wheels--chasing whatever just did great.

Research from a major mutual fund company shows that from 1926-2010, the odds of making money investing in the stock market depended greatly on how long someone stayed invested. Here are the historical numbers:

S&P 500 Index Historical % of Periods that Increased In Value

1 year periods: 72%
5 year periods: 86%
Do10 year periods: 95%
15 year periods: 100%

So, the longer you can invest, the more likely you may have average returns when investing in the stock market. If you have a properly planned investment policy, it's entirely in your control to sell early...or sell later. And if you can have that kind of patience, making money in the stock market is most likely entirely up to you.

Habit #6: Measure Performance Against the Right Benchmark

So you have a long term, diversified portfolio, full of domestic stocks (large and small), international stocks, bonds, maybe some real estate. You sit down after your first year to look at performance. How did you do? What do you compare your portfolio against?

For most people, they fixate on whatever they hear and see every day. The Dow Jones Industrial Average. The S&P 500 index. We hear it all the time from diversified investors. "How did I do against the S&P 500?" The problem is that the S&P 500 represents only Large US Stocks. What if those only make up of 25% of your portfolio? Is that a fair index for comparison? Absolutely not!

You should compare your portfolio to a blend of indices that closely resembles your own blend. That way, you can see more appropriately how you are doing. Qualified expert advisors can help you identify the appropriate benchmark for your portfolio. If you haven't developed Habit #1 (above) yet, look to target risk index funds as potential index benchmarks. Look for a mix that closely matches your allocation.

Habit #7: Invest Systematically or "How to force yourself to buy more low and less high"

Dollar cost averaging. You probably have heard this one before. Simply invest the same dollar amount regularly, regardless of market conditions. If markets are down, you get to buy more shares for each dollar. If markets are inflated, you will buy fewer shares at those high prices.

Used as a habit, systematic investing like this can help you accumulate shares over the long run. And you can do it without having to worry about getting in and out. The simplest way is usually through your employer's retirement plan. The money gets invested each pay period. Just commit to the system, and do it. As long as your investment mix stays in line with your Investment Policy Statement (Habit #3).

Habit #8: Use the tax code for your benefit

This is potentially huge! You always read about keeping costs down, right? Well the biggest potential cost of them all is optional taxes. Successful investors form a habit of using the tax code (legally) to their advantage. Here are a few examples of how to be tax-aware:

Put your income producing investments in retirement accounts, where their income is tax-deferred (or tax free in Roth accounts).
Put capital gain investments (like stocks) in taxable investment accounts. This basically defers the capital gain tax until you sell the stock.
Watch the tax cost ratio of mutual funds. Some mutual funds can generate a lot of taxable income capital gains.
Pay attention to any potential capital gains liability in a fund.
Use bear markets to harvest capital losses. Sell an investment that is down temporarily, and replace it with a similar investment. This one may seem odd. Why would I sell something when it is down if I'm in for the long haul? Because capital losses can be used to eliminate capital gains in the current year (and in future years if you don't have many gains this year)

Habit #9: Use temporary declines to your benefit

Successful investors tend to take advantage of down markets. Bond markets...stock markets...they don't care. They like to buy low! They believe that the long run trend is upward, so they feel confident investing in quality that have declined in value.

Carefully consider categories that may be "on sale" (but still within your investment policy!). You may buy early and it falls further at first. But if you invest in an entire category (large stocks, foreign bonds), they generally have had a long term upward trend. Take advantage of declines in prices.

Habit #10: Rebalance Periodically

Consider a regular re-balancing strategy. At the very least, this prevents you from violating your own investment policy statement. For example, if your investment policy is to be 50% stocks and 50% bonds, at the end of the year, one of them will have done better. Re-balance your portfolio back to your 50/50 target. That way you trim some gains and buy more of something that may be at lower prices. Without reblancing, you could find yourself taking on a lot more risk than you intended. That could end badly if you ended up with too much stock risk at the peak of a bull market! Over the long term, re-balancing may also reduce your volatility.

How often? Many studies have been done on re-balancing. Some people re-balance every quarter, monthly, annually, etc. Others advocate re-balancing on a trigger (if something is off target by a certain amount). The academic research that I have seen suggested that re-balancing of any kind may reduce volatility. It doesn't really matter how often; just that you do it regularly.

We are all 100% disciplined to our habits! We all have good ones and bad ones. This year, try to form some good investing habits and practice them. Some parts of the market may test you. Talk to your team of experts and ask them to help you apply these!

Disclaimer: This article should not be considered investment advice. See your professional team of qualified advisers for advice unique to your situation. No investing strategy can be guaranteed to work in the short run. No one can predict the future.