Everyday Money

The 7 Habits of Highly Effective Investors

These are the basics of running your financial life.

In a recent study, just 8 percent of college students taking a recent survey gave themselves an A for how well they manage their finances. In a larger, 2014 survey of U.S. adults, 18 percent gave themselves the top grade for their personal finance knowledge.

Many people get stressed even thinking about managing their money, seeing it as just too complicated. But Harold Pollack, a University of Chicago professor, famously fit the basics of good personal finance on an index card.

Here are seven simple ways to increase the odds of getting in and staying in good financial shape.

Once you’ve got these covered, you can explore investment opportunities. 

1. Save early, and automatically

The point is just to get in the habit of saving. Even if you start small, it’s a start. And seeing your money grow can be very motivating.

2. Expect financial emergencies

About 47 percent of respondents wouldn’t be able to cover an emergency $400 expense without selling something or borrowing money. So when you start saving, you may want to set aside money for an emergency fund before saving for retirement. That’s because, in a financial emergency, many people just tap into a retirement fund early and pay a penalty.

3. Set an asset allocation, and diversify

Asset allocation is an investor’s most important decision, said Bernstein. Research by numerous finance professors 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.

One rough rule of thumb Bernstein uses for setting a stock-bond allocation is that your age should equal your bond allocation. A 50-50 or 60-40 split is a good starting point, he said, but then you need to figure out your risk tolerance and tweak your portfolio to reflect that.

4. Keep fees low

With many people expecting future stock market returns to be muted, it’s more important than ever to keep fees low. Situations in which a retirement saver gets conflicted advice—meaning an adviser gets fees and commissions if the client buys a particular product—lead to returns roughly 1 percentage point lower per year, according to a report from the White House Council of Economic Advisers. The council estimated the aggregate annual cost of conflicted advice on Superannuation assets at about $17 billion a year.

For most people, keeping investments simple is the most cost-effective strategy. 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: 

5. Use a qualified adviser

Late-night television isn’t the place to find financial wisdom. 

6. Spend less than you earn

Spending more than they earn is a pattern for 23 percent of millennials and 19 percent of Gen Xers, according to a 2014 study by the Financial Industry Regulatory Authority’s Investor Education Foundation. So it’s not surprising that only about a third of each demographic has an emergency fund in place.

Part of what can make it tough to build an emergency fund is lifestyle creep. As we (hopefully) earn more, we often ratchet up our spending—we upgrade phones or cars, or take fancier vacations—rather than increasing our superannuation  contributions by 1 percent, or setting a higher amount of savings to automatically be taken out of pay.

7. Maximise employee benefits

Ensure your KiwiSaver contributions match those of your employers.

Source: Bloomberg