Earlier this year, the Wall Street Journal reported that nearly 10 million new brokerage accounts were opened in 2020, while Fidelity reported a 17% growth in new retail accounts.  Blame new investors stuck at home and tired of streaming movies.  They drove much of this new account and increased trading activity, looking to liven things up.  Their actions and behavior helped drive equity markets to all-time highs in the middle of a pandemic and the associated quarantine.  

At least some of those new investors were thinking longer term when they opened their new accounts, rather than hoping to pick up the latest hot stock.  To increase the odds of long-term success, we would offer the four suggestions below.  Each is a reliable habit new and seasoned investors alike should practice regularly.

Write down your goals

Multiple studies have shown that writing down goals increases the odds of achieving them.  When you write down your goals, at least two things are happening: encoding and the generation effect.  Encoding is part of the process of determining what information stays in our long-term memory and what gets discarded.  A written goal has a greater chance of being remembered.  The generation effect says we demonstrate better memory for the material we generate for ourselves than for information we read. In creating, visualizing, and documenting a goal, all that cognitive processing helps cement that goal in place.

By their nature, investment goals are usually long-term: savings for college, a vacation home, or retirement.  Long-term objectives require dedication, and written goals help stay on track.  When you review your financial position next year, your documented goals will remind you why you are saving and investing in the first place, allowing for informed discussion and any needed adjustments for the coming period.

Balance your portfolio

To pursue your goals with a highly concentrated portfolio places unnecessary risks to loss of principal and delays in reaching your objectives.  Instead, construct a diversified portfolio of multiple investments across various financial instruments, industries, and other categories whose prices behave differently to market events.  Diversification helps mitigate portfolio risks, offering slightly less return in exchange.  Diversification doesn’t guarantee against loss, but it is one of the most impactful levers to reaching long-term financial goals while keeping risks manageable.      

Minimize costs

Costs have a direct impact on portfolio returns regardless of portfolio returns.  Reducing costs where practicable will help reach financial goals faster.  Associated fees usually take two forms: financial advisory fees and investment management fees.  If you keep your own counsel and make your own decisions about stocks, bonds, or low-cost exchange-traded funds, you can keep these fees very close to zero.  Working with an advisor will make sense for many investors, but it is critical to understand what fees you will pay and to whom.  Some advisors will help create your plan but sub-contract the investment management to a third party for a separate fee.  Other advisors charge a single fee for both services. Both business models can work responsibly, but it requires clear and open communication from both parties. 

Stay disciplined 

Once you have written down your goals, diversified your portfolio, and kept a close eye on your costs, it is time to get disciplined.  Set up auto-deposits for your retirement plan or other savings accounts.  Resist the temptation to pick up the latest meme stock or cryptocurrency you read about in the paper.  When the equity market drops, don’t panic and sell.  Instead, consider rebalancing back to your target allocations to take advantage of lower share prices.  Check on your portfolio less frequently to reduce the desire to act.  Follow your plan.

Disclosure: https://mitchcap.com/disclosure/