The 9 best moves that will make you a better investor

Warren Buffet said it best: “You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences.” The secret to successful investing is there is no secret. It’s a simple process. Like getting fit, or building a good reputation, it’s about nurturing the right habits and putting them into practice over time. What are those habits? Read on but be warned... While most are deceptively straightforward, some require patience and persistence. It’s not easy being an angel! 

1. Ignore the noise and think long term

It’s all too easy to be blown off course by immediate crises that loom large in our lives today. But in the investing world these events inevitably prove to be footnotes in history.  Look at any chart of long-term stock market growth and see how the value of equities soars upwards despite setbacks from wars, recessions, and other reversals along the way. Stocks recovered from disasters such as COVID, the Great Recession, the Dotcom Bubble, 1970’s stagflation, and even two World Wars.  The world is always in a mess. But the engine of progress keeps pushing us forward. Equity ETFs harness the returns of that global productivity and make it work for you – so long as you don’t change tack during temporary upheavals. As Vanguard founder and index investing pioneer John Bogle said:  “The historical data support one conclusion with unusual force: to invest with success, you must be a long-term investor.” Counterintuitively, the greatest opportunities are to be found when prospects look bleakest. Cheap equities lock in profits for the future, when confidence is restored and prices rebound.  Thankfully our next habit enables you to make the most of those opportunities without second-guessing the market. 

2. Cost averaging

Regularly saving into the market enables you to buy equity ETFs on sale which turbo-charges your returns when values rocket again.  Cost averaging is the discipline of continuing to make monthly investments into your portfolio come hell or high water. The beauty of this strategy is that you buy even more shares than usual when their cost is low. And each one of those shares will make a substantial profit over time as prices resume their upward trajectory. It may seem safer to sit out downturns in cash, but the reality is that even professional investors undermine their results by mistiming their trades. That’s why Warren Buffett warns us against trying to beat the market.  Your best move is to buy the dip using cost averaging and allow the market’s natural volatility to work in your favour.

3. Automate your investing

Successful investing is really the sum of incremental gains derived from good habits. And our best habits are low maintenance. They’re frictionless routines that we don’t even have to think about. How do we achieve that with investing? It’s remarkably easy: 

• Choose a globally diversified buy-and-hold strategy centred on the best World ETFs
• Set up your monthly investment contribution as a direct debit with your broker.
• Use an ETF savings plan to automatically channel your money to your chosen ETFs for the lowest possible cost.
• Choose accumulating ETFs and your dividends will be reinvested for you. There’s no need to lift a finger.
• Review your portfolio once a year. Otherwise leave it alone to rise like bread in the oven.

If you’ve ever stumbled across those stories about how “the best investors are dead or have forgotten their account…” that’s the effect we’re trying to achieve here.  Automate everything as much as possible to avoid falling into bad habits. As the great Benjamin Graham said:  “The investor's chief problem – and even his worst enemy – is likely to be himself.”

4. Don’t check your performance

This is yet another sound investing habit that flies in the face of herd thinking: Micro-managing your investments is the enemy of good long-term performance. The problem is that the stock market has a fifty-fifty chance of being down on any given day. But it’s more likely to register gains over time. For example, global equities typically show a loss one year in three. And are rarely down over a decade or two.  Hence the less often you check your portfolio, the less likely you are to suffer bad news. Rid yourself of unnecessary negativity. Review your portfolio once a year by logging on via your broker’s website. You can’t control the market by looking at it anyway. Choose peace of mind instead. 

5. Crush costs

Fees destroy investor returns. Paying a 1% annual charge doesn’t seem like much until you measure it against the average market return.  Global equities have earned an annualised real return of approximately 5% since 1900. But if you shell out 1% per annum in fees then you’ve just lost 20% of your profit. By contrast you can pay as little as 0.1% to 0.2% for diversified ETFs. That saving stops a staggering amount of your wealth leaking away to active managers who can’t justify their fees anyway. As John Bogle points out: “The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.” What’s more, low Total Expense Ratios (TERs) predict higher future returns as independent financial data firm Morningstar has shown. That’s because high fees materially damage investor returns over time.

6. Upweight your contribution by inflation every year

This one is too easy to overlook. It’s important to adjust your investment savings for inflation to ensure you’re on track to achieve your goals. The example below shows you how to make your own inflation adjustment:

• Current monthly contribution: 500€ 
• Annual CPI inflation: 10%
• 500€ x 1.03 = 550€

Your inflation-adjusted contributions should now be 550€ per month for the next year. Adjust your savings accordingly – if this is possible right now with the higher inflation we face. Perform this calculation once per year during your annual review. Upweight your portfolio’s target number and target income by inflation too. These increases help your portfolio keep up with the rising cost of living.  We are aware that this is difficult to implement in times of high inflation. But still, you should try.

7. Take advantage of tax shelters and reliefs

This is an absolute no-brainer. Always, always make the best use of any tax-free, tax-advantaged, or tax-deferred accounts you're eligible for. Tax reliefs are generally worth taking even if it means locking up your money for many years.  For example, if you receive 20% tax relief on pension contributions that amounts to an instant gain of 20% on your cash before you even put it to work in the market. That’s an almost unbeatable benefit especially as we all have to retire one day. Remember that every euro you gain (or don’t lose) is a euro that’s compounding on your behalf for years to come. 

8. Rebalance to control risks

Rebalancing is an ingeniously simple technique that controls your exposure to risky assets. 

• Imagine your portfolio is split 70:30 between global equities and government bonds
• Equities then rise by 10% while bonds stay flat.
• Now your asset allocation is 77% equities and only 23% bonds.

If equities enjoy a sustained bull market then your bond portion could continue to contract. A recession hits a few years down the road but your bond percentage is too small to provide adequate crash protection.  That’s where rebalancing comes in. It enables you to systematically combat asset allocation drift that makes untended portfolios riskier over time.  You simply sell off the outperforming asset occasionally, and buy into the underperformer until your original asset allocation is restored.  Happily that also means buying ETFs low and selling high. So while the primary goal of rebalancing is risk management, you may enjoy a rebalancing bonus by trimming an overvalued asset before the market catches up with it. 

9. Stay diversified

Diversification is known as the only free lunch in investing because you’d be mad to pass it up But when an asset class is down it can be easy to forget why we ever invested in it. For example, bonds have had a torrid time of late. You’d be forgiven for doubting their usefulness. Yet high-quality government bonds remain the best diversifier for an investor whose portfolio is dominated by equities. When recession comes those bonds are likely to outperform equities. Firstly, they act as a bulwark against stock market losses more often than not. Secondly, they’re a source of dry powder that you can use to scoop up equity ETFs on sale by rebalancing into them from your bond reserves.  The practice worked during the Dotcom Bust, the Great Recession and the Euro Debt Crisis. Of course, it’s not guaranteed which is why it’s a good idea to diversifty into a gold ETC too. Gold can work when nothing else does because it enjoys a near zero correlation with equities and bonds. Unfortunately, the price of diversification is that something in your portfolio will always be causing you pain. But spreading your bets across the key asset classes is still the best way to future-proof yourself in an uncertain world.

Putting it all together: our conclusion

Habits are hypothesised to rely on a neurological loop that consists of a cue, routine, and a reward. Forming good habits relies on ensuring each cue triggers the right routine, and then the rewards will follow. Set up your portfolio using the principles of a diversified asset allocation and a buy and hold strategy and you’re already off to a great start.  Automate your investing using a great-value ETF savings plan and cost-averaging takes care of itself.  Calendarise an annual review then:

• Upweight your contributions for inflation
• Check your ETFs are cost-competitive
• Rebalance for risk control
• Let justETF monitor your portfolio and alert you to unusual market moves. Leaving you to get on with your life. 

Remember to stick to the plan even if it’s been a bad year. Do not panic, do not market-time, chase performance, or commit any of the other classic investment mistakes.  As the wonderful investment educator William Bernstein put it: "Wall Street is littered with the bones of those who knew just what to do, but could not bring themselves to do it." Real investing is not like Vegas. It’s meant to be boring. But like dieting or working out, the best results come to those who stick with it and do the little things right.