The 7 Habits of Highly Effective Investors


In The 7 Habits of Highly Effective People, Dr. Stephen Covey identifies key habits successful people share to achieve their goals.  Here is my attempt to drill these habits down for investors.

Habit 1: Be Proactive (Be Ready for Financial Emergencies)
About 47 percent of respondents in the Federal Reserve’s 2014 household survey said they wouldn’t be able to cover an emergency $400 expense without selling something or borrowing money.  So start by setting aside money for an emergency fund before saving for retirement.  In a financial emergency, too many people tap into their retirement fund early and pay a penalty.  (And your credit card is not your emergency savings fund!)

Habit 2: Begin with the End in Mind (Develop A Strategy and Stay With It)
Asset allocation is an investor’s most important decision. Research by various financial gurus has shown that the vast majority of returns over time come from asset allocation rather than picking the right security or the right time to invest in the market.  (See Habit 5 too.)

Habit 3: Put First Things First (Pay Yourself First)
Just to get in the habit of saving.  Even if you start small, it’s a start.  Seeing your money grow can be very motivating.  If you have a retirement plan at work, join it.  Place at least enough money into it to maximize your company’s matching contribution.  Open a Roth IRA and contribute $50 or $100 per month that is withdrawn from your checking account.

Habit 4: Think Win/Win (Spend Less Than You Earn)
Spending more than you earn is a pattern for 23% of millennials and 19% Gen Xers, according to a 2014 study by the Financial Industry Regulatory Authority’s Investor Education Foundation.   Part of what can make it tough to build an emergency fund (Habit 1) is lifestyle creep.  As you earn more, increase your retirement savings or make debt pre-payments (in other words, don’t upgrade phones, TVs, cars, or take fancier vacations.)

Habit 5: Seek First to Understand, Then to Be Understood (Use a Fiduciary Advisor)
Financial analyst is just a fancy term that doesn’t actually mean anything.  Even many well-credentialed financial advisers are paid on commission, so if they recommend something for you it may be because they stand to make money. Sometimes they’re actively incentivized not to act in your best interests.  Ask your advisor if they are a fiduciary and what does that term mean to them? 

Habit 6: Synergize – (Keep Fees Low)
Warren Buffett is a longtime fan of investing in low-cost index funds, and in his 2013 Berkshire Hathaway shareholder letter, Buffett shared the advice he gave to his estate’s trustee:  “Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund.” 

Habit 7: Sharpen the Saw (Maximize Employer Contributions)
Maximize your employer’s 401(k) contribution match.  A Roth 401(k) is funded with after-tax dollars, whereas the tax on money going into traditional 401(k)s is deferred until you take it out in retirement.  About 50% of all employers now offer Roth 401(k)s, but only about 25% of plan participants choose them.