Erik Davidson, Chief Investment Officer of Wells Fargo Private Bank, has lived through his share of economic fluctuation. He spent time on Wall Street during the 1980s, in Tokyo during the 1990s, and in California during the 2008 financial crisis.
Through the years, Davidson has worked with hundreds of investors, and he’s noticed that the most successful share a few key habits that help them build wealth. He says by emulating these seven traits, you too could be on the path to investment success.
1. They set specific financial goals.
Just as you wouldn’t walk up to an airline counter without knowing where you’re going, you shouldn’t invest without first outlining your goals. Do you have specific short-term goals (for example, buying a vacation home) and long-term goals (like leaving a legacy)?
2. They calibrate their investment strategy to those goals.
Share your goals with your investment professional, and work together to create a plan for reaching them. “One of the bigger questions will be, what time period are you talking about?” Davidson says. “For short-term goals, you’ll need more cash and fewer stocks. For longer-term goals, I feel that you should be more aggressive. You’ll see more fluctuation, but time is on your side.”
3. They have an “all-weather” (diversified) portfolio.
No one can predict what the markets will do, but you can manage your overall risk by diversifying your portfolio. Davidson recommends considering having some exposure to each of the four major asset classes: stocks, bonds, real assets (commodities, real estate), and alternatives (hedge funds, private equity). The performance of different asset classes will vary, so when one area drops, you may get a boost from another that is performing well.
4. Their portfolio is globalized.
As a general rule, about a third of your portfolio should be invested outside the United States, in Davidson’s opinion. He notes that much of the global economy is outside of the U.S., including 95 percent of the world’s population, three-quarters of the world’s economic production, and two-thirds of the world’s market capitalization. “Many other countries have much better growth rates and a younger population,” he says. “And while our market is hitting all-time highs, many foreign markets are well below their all-time highs.”
5. Instead of “buy and hold,” they “buy and manage.”
Many investors believe a “buy and hold” strategy means you put your portfolio on cruise control and forget about it — but that may not be wise, Davidson says. “The world changes, your goals change, your temperament for risk changes, and your portfolio changes — so you have to adjust,” he says. “If you just leave it alone, some parts of it will grow like an untended garden, so you end up with too much exposure in that area.” He recommends reviewing your portfolio at least once a year to rebalance and make sure the mix of investments still fits your goals.
6. They don’t let emotions take over.
Davidson says “follow your heart” is a great life motto — except when it comes to investments. When you see a sector explode, it’s human nature to want to get in on the action. “People get so enamored with whatever is hot in the moment,” he says. “We saw that with the tech bubble, the housing bubble, the gold bubble, and the Bitcoin bubble.” It’s also difficult not to panic during difficult times when you’re losing money and all you want to do is get out. “Try to remember that you usually are better off doing the opposite of whatever your heart tells you,” Davidson advises.
7. They listen to guidance.
An investment professional’s job is to help you stick to your plan no matter what your heart is telling you, and recommend adjustments when necessary. “Your advisor should bring objectivity, experience, and expertise to the table,” Davidson says. “Working with someone who can help us to get out of our own way is critical to navigating the emotions that come with the pressures of investing.”
