7 Habits of Highly Effective Investors

There are many roads to financial well-being, but research suggests those who enjoy uncommon success share common behaviors.

Here’s a data-driven look at what makes seven such habits so effective—and how to start incorporating them into your own financial life.

Habit 1

Start investing now

The earlier you start, the less you may have to save to reach your goal, thanks to the potential for long-term compound growth. Consider two investors who each wanted to save $1 million by age 65:

  • Rosa started investing at age 25 and so needed to save just $5,720 a year to achieve her goal.
  • Jin didn’t start investing until he was 35 and so needed to save $11,125 a year to achieve the same goal.

“Age 35 is still quite young, but Jin nevertheless had to save nearly 50% more than Rosa to achieve the same goal,” says Mark Riepe, head of the Schwab Center for Financial Research. “Not everyone will be able to do that, which is why it’s so important to invest as much as you can as early as you can.”

Source: Schwab Center for Financial Research. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product.Calculations assume a lump-sum investment on January 1 of each year and a 6% average annual return, and do not reflect the effects of investment fees or taxes.

Habit 2

Diversify, diversify, diversify

Investing across and within asset classes can not only help protect against large drops but also potentially boost your portfolio’s value. For example, over the past 20 years a diversified portfolio of stocks and bonds would have had an ending value nearly 9% greater than an all-stock portfolio—and been less volatile in the bargain.

“A diversified portfolio won’t always outperform an all-stock portfolio, but it will generally lose less of its value during a downturn,” Mark says. “And when your portfolio is less volatile, you’re less likely to make rash decisions that could undercut your savings.”

Source: Schwab Center for Financial Research and Morningstar. Data from 09/30/2000 through 09/30/2020. The example is hypothetical and provided for illustrative purposes only. Portfolio performance during market crashes is based on monthly data, not peak-to-trough declines. The blended portfolio is composed of 60% stocks and 40% bonds. Stocks are represented by the S&P 500® Index and bonds are represented by the Bloomberg Barclays U.S. Aggregate Index. The blended portfolio is rebalanced annually. Returns include reinvestment of dividends, interest, and capital gains.

Habit 3

Minimize fees

Management fees—from expense ratios charged by index funds to the annual fees charged by an advisor—are often a necessary part of investing. That said, even seemingly small differences can erode your returns over time.

“Make sure you’re getting what you pay for—whether that’s strong returns, exceptional service, emotional support that keeps you on track, or practical, trustworthy advice,” Mark says. “In any case, it’s wise to scrutinize your investment expenses regularly, perhaps as part of your annual portfolio review.”

Source: Schwab Center for Financial Research. The example is hypothetical and provided for illustrative purposes only. Ending portfolio balances assume a starting balance of $100,000, a 6% average annual return, no additional contributions or withdrawals, and do not reflect the effects of taxes.

Habit 4

Stay invested

When the market’s in free fall, it’s tempting to flee to the safety of cash. However, pulling out of the market for even a month during a downturn could seriously stunt your returns, as the examples below show.

“The problem with selling during a market drop is that by the time you act, the worst may already be behind you,” Mark says. “Thus, not only are you locking in your losses, but you’re likely to miss some of the best days of the recovery, which often happen within the first few months.”

Source: Schwab Center for Financial Research and Morningstar. Data from 01/1970 through 12/2019. Market returns are represented by the S&P 500® Total Return Index, and cash returns are represented by the total returns of the Ibbotson U.S. 30-day Treasury Bill Index. Examples assume investors who switched to cash investments did so in the month that the market reached its lowest point and remained in cash for either one, three, or six months. Cumulative returns are calculated using the simple average of returns from each period and scenario. Past performance is no guarantee of future results.

Habit 5

Make tax-smart decisions

Taxes may be a certainty, but there’s still plenty you can do to try to minimize them. For example, how you sell appreciated investments can have a big impact on how much of your gains you get to keep.

“You never want to think about taxes after the fact, because by then it’s too late,” Mark says. “Instead, taxes should be an integral part of your investment choices—because seemingly small decisions can have big implications on your tax bill.” 

Let’s say you’re looking to realize a $50,000 gain on an investment you’ve held 11 months. Because you’ve held the investment less than a year, your gains will be taxed at your marginal federal tax rate—24% for a single filer making $100,000—resulting in a $12,000 tax bill ($50,000 × .24).

To reduce your tax bill, you could take one of three common approaches:

  • Approach 1: Hang on to the investment for at least a year and a day, at which point any gains would be taxed at your long-term capital gains rate of 15%, resulting in a $7,500 tax bill ($50,000 × .15).1
  • Approach 2: Sell another investment at a loss in order to offset some or all of your short-term $50,000 gain. For example, if you realize $35,000 in losses, your gains would be reduced to just $15,000, resulting in a $3,600 tax bill ($15,000 × .24).
  • Approach 3: Combine approaches 1 and 2—holding on to your investment for at least another month and a day and realizing $35,000 in losses to offset your $50,000 gain, resulting in a $2,250 tax bill ($15,000 × .15).

The example is hypothetical and provided for illustrative purposes only.

Habit 6

Increase savings at every opportunity

Instead of saving a flat dollar amount each year (see “Scenario 1,” below), consider contributing a percentage of your income so your contributions increase anytime your income does (see “Scenario 2”). “Of all the ways to save more, this approach is pretty painless,” Mark says. “It doesn’t eat into your take-home pay because it’s being skimmed off your raise. It’s harder to miss what you never had to begin with.”

Better yet, increase that percentage by at least a point anytime you get a raise, which can have an even greater impact on your portfolio value (see “Scenario 3”).

Source: Schwab Center for Financial Research. Scenarios assume a starting salary of $40,000, annual cost-of-living increases of 2%, and a 5% raise every five years. The example is hypothetical and provided for illustrative purposes only. It is not intended to represent a specific investment product.Ending portfolio balances assume a 6% average annual return and do not reflect the effects of investment fees or taxes. In Scenario 1, the investor contributes 5% of her pretax income in the first year and then contributes that same dollar figure in subsequent years. In Scenario 2, the investor contributes 5% annually at the start of every year from age 25 through age 65. In Scenario 3, the investor contributes 5% annually at the start of every year beginning at 25 and then increases her contribution rate by 1 percentage point with each raise.

Habit 7

Create and follow a financial plan

Last but not least, Schwab’s 2019 Modern Wealth Survey found that individuals who have a written financial plan are more likely to exhibit other healthy habits, as well. “It’s not surprising that people who put in the effort to plan for the future are more likely to take the steps necessary to make that vision a reality,” Mark says.

 

Source: Schwab Modern Wealth Survey. The online survey was conducted from 02/08/2019 through 02/17/2019 in partnership with Logica Research among a national sample of Americans ages 21 to 75. Quotas were set so that the sample is as demographically representative as possible.

1Long-term capital gains rates are 0%, 15%, or 20%, depending on income, plus a 3.8% surtax for certain high-income earners. If you decide to hold on to the investment for at least a year and a day, be aware that your investment could decrease in value during that time.

Important Disclosures

Investors should consider carefully information contained in the prospectus or, if available, the summary prospectus, including investment objectives, risks, charges, and expenses. Please read it carefully before investing.

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Portfolio management services are provided by Charles Schwab Investment Advisory, Inc. (“CSIA”). Schwab and CSIA are subsidiaries of The Charles Schwab Corporation.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

While Schwab Plan is available to clients at no cost, any investments you ultimately make may incur costs such as fund operating expenses and advisory fees.

Diversification, asset allocation, and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when a nonretirement account is rebalanced, taxable events may be created that may affect your tax liability.

Investing involves risk, including loss of principal.

Indexes are unmanaged, do not incur management fees, costs, and expenses, and cannot be invested in directly. For more information on indexes please see schwab.com/indexdefinitions.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.