The 4 Keys to Becoming a Successful Investor

Many people believe success in investing hinges on timing the market or spotting undervalued stocks before anyone else. However, decades of data across numerous markets show that achieving this consistently is incredibly difficult, if not impossible. The path to successful investing lies in building the right mindset and strengthening your financial literacy. By focusing on long-term principles and developing habits that improve resilience and decision-making, you will be better equipped to navigate the ups and downs of the market and build wealth over time.

1. Conviction in Your Market and Long-Term Vision

To succeed in any market, you must have conviction in the assets you invest in. Long-term success isn’t about quick wins—it’s about letting your investments grow, sometimes over years or decades. This means genuinely believing in the long-term growth potential of your investment. Conviction keeps you anchored when things get tough. For instance, during periods of high volatility or economic downturns, your belief in the future potential of your investments could help you resist the urge to panic-sell. So, before you dive in, take the time to understand the broader trends in your market and why it has staying power.

Having conviction doesn’t mean ignoring risks; instead, it’s about trusting that your long-term view in the face of short-term market fluctuations. Cultivating this mindset helps you stay steady through the inevitable ups and downs of the market. To illustrate this, data from 1992 to 2024 shows that the probability of experiencing a negative return when holding the Dow Jones Industrial Average (DJI) for just six months is 28%. However, this probability diminishes dramatically the longer you hold on to it, dropping to 0% for investors who maintain their position for 20 years.

Actionable Steps:

• Do your homework - understand why your chosen assets have the potential to grow.
• Set long-term goals - define what success looks like for you over a 10-, 20-, or 30-year horizon.
• Review regularly - revisit your investment thesis periodically to ensure it still aligns with your long-term view.

2. Tuning Out the Noise – Especially from Market Experts

Noise is everywhere in today's digital age: 24/7 news cycles, social media commentaries, and even well-meaning friends. However, reacting to every headline or prediction can derail your long-term strategy.

If you search Google News using terms like "market crash" or "bubble burst," there's no lack of so-called experts warning of an impending market downturn, even during the strong bull market we experienced over the last two years. During periods of market volatility, the chorus of naysayers tends to get even louder. Many of these voices may make you question your investment plans, often prompting unnecessary stress and even impulsive decisions.

Remember, no one has a crystal ball, and most of those warning you about potential downturns don’t have any clearer insights than you do.  A 2018 study by David H. Bailey, Jonathan Borwein, Amir Salehipour, and Marcos Lopez de Prado found that two-thirds of financial gurus examined have forecast accuracies of less than 50%, and only 48% of the forecasts examined were correct. Successful investors know how to filter out distractions and focus on their long-term strategy.

Actionable Steps:

Recognize that no one can read the market and concentrate on your strategy —reacting emotionally to every forecast will only lead you off course.

3. Build a Robust Safety Net

Having a personal safety net is often a neglected aspect of successful investing. Risk is an inherent part of investing. Even the most thorough research can’t eliminate it, which is why having a safety net is vital. A solid financial safety net can provide the cushion you need to remain claim during market downturns.

This safety net gives you breathing room, so when the market dips, you don’t feel pressured to sell at a loss. Instead, you can stay calm and potentially capitalize on lower prices. Having a fallback reduces the likelihood of rash decisions, allowing you to keep your focus on your broader financial goals.

In Singapore, we are privileged to have CPF Life, which guarantees a basic lifetime income from age 65 onwards. Personally, I maximize my CPF Special Account by transferring funds from my Ordinary Account and making CPF top-ups. With this very strong safety net in place, I feel more at ease to invest bulk of my wealth in the stock market.

Actionable Steps:

• Build an emergency fund - aim to save 3-6 months' worth of living expenses in an easily accessible account.
• Leverage national saving programmes i.e. CPF

4. Knowledge: Invest with Confidence in Your Choices

Knowledge is the foundation of any sound investment strategy. Before putting your money on the line, you need to research thoroughly, understand the risks, and assess your comfort level with the potential outcomes. A well-researched decision doesn’t just improve your chance of success – it also boosts your confidence. When you know you've done your due diligence, you tend to feel more secure with your choices, even if they take time to pay off.

I have intentionally placed knowledge as the last key because without the right mindset outlined in the first three keys, having knowledge alone may not lead to effective execution. For instance, a large body of research has shown that the best investment strategy for retail investor is to buy low-cost, globally diversified funds/ETFs and hold them for the long term. However, the discipline to stick to this strategy is rare. Many investors feel compelled to react to market noises or worry that short-term losses. Others may wait for their desired entry price that never comes, causing them to miss out on market growth. Ultimately, it’s crucial to combine knowledge with a resilient mindset to ensure that you can navigate the complexities of investing successfully.

Actionable Steps:

• Educate yourself continually - read books, follow reputable financial blogs and podcasts.
• Join like-minded communities - engage with other investors to exchange ideas and learn from each other

Wrapping It Up

Becoming a successful investor is about having a clear belief in the markets you choose, ignoring the noises, creating a financial cushion, and building your portfolio on a solid base of knowledge. These keys not only improve your chances of financial growth but also allow you to invest with peace of mind.