As thestock market plunged in 2008 (for the second time in less
than a decade), many people concluded the world ofinvesting was
just too risky.
Yet since the market bottomed out in early 2009 and has doubled
in value in the subsequent four years, many of those same people
are starting to wonder if avoidingstocks is the wisest choice.
For many people, the answer is easy.Put away somemoney every
year in a solidmutual fund orindex fund , and let nature take its
course. Studies show that holding onto a broad-based
diversifiedfund for many yearswill always grow in value faster
thancash sitting in the bank.
Another cadre of investors would like to exercise greater control
over their financial future. These are the folks who read the
business section of the national newspapers, buy the occasional
financial guide at a local bookstore or tune in to the nation's top
business shows.
Are these folks prepared to be active investors? There are
basically four qualities an active investor needs. Do you have
them?
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1.
A strong stomach |
As the past half decade has shown us, the market repeatedly
rises and falls (though it invariably makes new highs over
longer time frames). Yet here's what they don't tell you.
Stocks climb slowly and fall quickly. The plunge in 2008 and
early 2009 wiped out many years' worth ofgains .
And even as the S&P 500 has rebounded nicely in recent
years, it often still feels like a roller coaster. In the
first part of 2010 and 2011, early year gains were met with a
much sharper summer-time swoon. In 2012, the downturn wasn't
as deep, but the nearly 10% loss in just one month (May) was
enough to shake investors' faith yet again.
We're off to a similarly robust start in 2013, and when
the next inevitable sharp pullback comes, investors will need
to show real fortitude. If you can emotionally handle the
scary times, then you're off to a good start as an
investor.
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|
2.
A talent for math (or at least not a fear of it) |
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There's another key toactive investing , and you'll soon
discover if you have what it takes. Although most people are
pretty good at arithmetic and algebra, investing requires an
especially strong aptitude with numbers. Over the course of
just one hour of investing, you're likely to come across
dozens of sets of figures and ratios, and you'll need to
quickly, intuitively grasp the relationships between these
numbers.
If you're taking a great deal of time to compare
thebalance sheet ratios between
IBM (NYSE:
IBM
)
and
GE (NYSE:
GE
)
, then you'll be exhausted by the time you have gone on to
the next phase of your research. The best investors, indeed,
the only investors who remain active over many years, can
usually make instant calculations in their heads. If math
isn't your strong suit, then active investing may not be for
you.
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3.
A willingness to sacrifice your time |
There's a reason why viewers of CNBC tend to be older, and
often retired. Keeping up with general business trends, and
then finding the time to continually research the stocks
andfunds you already own (or are looking to buy) takes a huge
amount of time. If you hold down a full-time job, then your
investment-related research may have to wait until the
weekend -- right at a time when you should be relaxing from
the work week.
How much time are we talking about? Count on spending at
least five hours per week to be an adequate stock picker, and
closer to 10 hours per week to become a proficient investor.
[My colleague Andy Obermueller explores exactly these kinds
of finds, revealing the next big, life-changing investing
idea in his
Game-Changing Stocks
newsletter.
See his latest report
for more ground-breakinginvestment plays.]
The key is to stay focused. Many investors mistakenly try
to absorb huge amounts of information provided by various
media outlets andWall Street research departments. That only
helps you to have a broad, but shallow understanding of
keyissues that will boost the value of your portfolio. It's
wiser to focus on less than a dozen companies -- or even just
a few industries -- and concentrate all of your efforts
there.
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4.
Comfort in your investing skin |
The fourth ingredient isn't something you're born with; it's
something you develop: wisdom.
Even the best investors made plenty of mistakes early in
their investing careers, but by learning from those mistakes,
they gradually improved. Years later, these same investors
have the same accumulated wisdom as the investment world's
top performers.
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Action to Take -->
Until you feel ready to strike out on your own, there are ways to
ease into the market. A number of friends in their 50s and 60s have
approached me over the years, asking if they should become active
investors. Considering it can take more than a decade simply to
become an experienced investor, I usually suggest they buy a great
index fund (such as the
Vanguard S&P 500ETF (NYSE:
VOO
)
, which carries an absurdly low 0.05% annualexpense ratio ). This
fund provides direct exposure to the top U.S. companies -- without
the hassle of investment research.
This article originally appeared on InvestingAnswers.com:
The 4 Qualities
That Take An Investor From Good To Great
-- David Sterman
P.S. -- Chief Investment Strategist for Game-Changing Stocks
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What we've found will surprise you. This investing opportunity is
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David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.