Poor investment returns can be blamed largely on investor behaviour rather than the performance of the investment. According to the research, investors deserve the blame because they lack the discipline and patience to weather stock market dips.
How can you become a better investor?
- Have written goals: Write down your goals including purchasing a home, setting up your practice, financing your children’s education, and saving for retirement. Studies show that individuals with written goals have a much larger chance of success than those who keep them in their head.
- Invest automatically: Take a fixed portion of your income each month and invest. Systematic investing reaps great rewards. Consider strategies such as dollar cost averaging. By using this technique, you will purchase an investment with a specific amount of money at specific intervals. It does not matter whether the market is up or down, you invest the same amount. Under the dollar cost averaging method, when prices are down, you buy more shares than when the prices are high. This method does not guarantee success, as you still need to find the right investment vehicle. But it will decrease your emotional, knee-jerk reactions to market declines and assist you to become a disciplined investor.
- Start to invest early: Check out our August newsletter on compounding with illustrations on how you can harness the power of compounding by starting your investments as early as you can.
- Minimize your income tax: Income tax is your biggest expense and you should explore all available tax saving opportunities. For instance, many of our clients have saved hundreds of thousands of tax dollars by implementing a method to report shareholder draws from their professional corporation as a capital gain instead of the higher taxed dividend.
- Live frugally: What determines the size of your investment is not how much income you generate but how much money you spend. Especially when you save up for your retirement nest egg, the recommendation by most financial planners is that you spend no more than 4% of your investments each year.
