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By Christine Benz and Adam Zoll | 04-22-2015 06:00 PM

7 Habits of Successful Investors

Special presentation: Learn how 'cheaping out,' building in discipline, and other simple steps help successful investors get it done.

Note to viewers: Filmed in late April 2015, this Morningstar presentation was part of Money Smart Week, a series of free classes and activities organized by the Federal Reserve Bank of Chicago and designed to help consumers better manage their personal finances.

Christine Benz: As we all know, there are a lot of ways that investors can find success. They can find success through picking individual stocks. They can find success through picking mutual funds. They can find success through using just a simple target-date mutual fund. There are lots of ways to get it done. But when we look across successful investors, we do see some commonalities among their habits, and that's what Adam and I are going to talk about tonight.

We're going to divide and conquer. Adam is going to discuss four habits of successful investors, and I'll discuss the last three. Toward the end of the presentation, I'll also share some model portfolios that we have been working on for Morningstar.com. In a lot of ways, we think these portfolios illustrate some of the habits that we'll go through during the course of this presentation.

So, let's get right into the presentation. Let's talk about, first, what is a successful investor? And I think, in lot of ways, it can be helpful to think about what isn't necessarily a successful investor. Investment success isn't necessarily beating the market. It's not beating Warren Buffett. It's not generating returns that are higher than your neighbors or your brothers-in-law. Really, the main thing when you think about investment success is [whether or not you were] able to reach your financial goals. So, for most of us, this will entail achieving a comfortable retirement. Are we on track to achieve a comfortable retirement? If we wanted to fund college for our children or grandchildren or maybe fund some continuing education for ourselves, were we able to achieve that? Or perhaps we have shorter-term financial goals--and many of us do. So, if we wanted to buy a new car or buy a new home or make some home remodeling, were we able to achieve those goals? So, fundamentally, the question of whether or not you were able to achieve your financial goals should be your measure of your own success as an investor.

Along the way, we want to make sure that investors get there through skill and not luck. A successful investor is someone who understands the basics of saving and investing, who understands some of the key habits that tend to lead to investment success, and also avoids some of the big mistakes and some of the bad habits that investors can fall into.

In addition, we also define investment success as whether or not you were able to achieve peace of mind along the way. So, even if you were, in the end, able to reach your financial goals or maybe save and invest a sum that was way more than you expected, were you able to sleep easily at night? Balancing risk with returns is certainly fundamental to investment success as well. So, when we think about investor success, these are some of the key things we think about as defining investment success.

I'm going to just quickly outline the seven habits that Adam and I will spend a little more time on during the course of this presentation. First of all, successful investors tend to "cheap out." So, they watch their investment costs every step of the way, because those costs can eat into their take-home returns. Adam will outline some of those investment costs and steps you can take to reduce them.

Successful investors also focus on the big picture and tune out the noise. There's lots of information flowing about the markets, and it's important--to the extent that you possibly can--to tune a lot of that out because, ultimately, it doesn't affect your investment success. Instead, successful investors focus on the big picture. Successful investors also know themselves. They know the role that behavior can play in financial decision-making, and they take steps to ward against some of those behavioral traps. Successful investors also build in discipline, and here Adam will talk about some ways that you can, in some respects, put your plan on autopilot to kind of build discipline into your plan.

Successful investors also multitask, and this is something I'll be talking about in the course of my portion of the presentation. How do you juggle competing financial goals? Because most of us, at every life stage, are juggling some competing financial goals. How do you set those priorities and determine the best use of your capital at any given point in time.

Successful investors focus on limiting taxes. Just as they focus on limiting costs in their investments, they also focus on limiting the drag of taxes. And I'll talk about some specific ways that you can do that in your own investment plan.

And, finally, successful investors keep it simple. They avoid overcomplicated strategies. They avoid tactical market-timing strategies. They avoid narrowly focused investment products and, instead, run streamlined investment programs. And that's what I think the model portfolios will nicely illustrate--the merits of running a streamlined portfolio. So, I'll share three specific portfolios for investors at various life stages that I think illustrate the virtues of keeping things simple.

With that, Adam is going to come up here and get into four of the seven successful investing habits that we'll talk about during the course of the presentation tonight.

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