6 Habits of Successful Investors (From Fidelity Investments)

~ Friday, June 16, 2023 Blog Post ~

By Fidelity Viewpoints, April 2023

Key takeaways

• Creating a financial plan can help you make better decisions about investing and saving.
• It’s important to stick to your plan, even when financial markets are turbulent.
• Fidelity can help you set goals and create a plan, regardless of how much money you have to invest.

Investing is not about “getting rich” or “playing the market.” It’s an essential part of achieving financial wellness. That means being able to meet your needs and the needs of those who depend on you as well as being able to set and achieve goals that go beyond merely being able to pay your bills and manage debts like mortgages, credit cards, and student loans.

These 6 steps can help you increase your investing success and achieve financial wellness, even when financial markets seem unfriendly.

1. Start with a plan

At Fidelity, we believe creating a financial plan can provide the foundation for investment success. The financial planning process can help you take stock of your situation, define your goals and figure out practical steps to get there.

Financial planning doesn’t have to be fancy or expensive. You can do it with the help of a financial professional or an online tool like those in Fidelity’s Planning & Guidance Center. Either way, making a plan based on sound financial planning principles is an important step.

A plan is one service that financial professionals frequently offer their clients.

2. Stick with your plan, even when markets look unfriendly

When the value of your portfolio falls, it’s only human to want to run for shelter. But the best investors don’t. Instead, they maintain an allocation to stocks they can live with in good markets and bad.

The financial crisis of late 2008 and early 2009 might have seemed a good time to run for safety in cash. But a Fidelity study of 1.5 million workplace savers found that those who stayed invested in the stock market during that time were far better off than those who headed for the sidelines.1

In the decade following the crisis, those who stayed invested saw their account balances — which reflected the impact of their investment choices and contributions — grow 147%. That’s twice the average 74% return for those who fled stocks during the fourth quarter of 2008 or first quarter of 2009. While most investors did not make any changes during the market downturn, those who did made a fateful decision with a lasting impact. More than 25% of those who sold out of stocks never got back into the market and missed the gains that followed.1

If you get anxious when the stock market drops, remember that’s a normal response to volatility. It’s important to stick with your long-term investment mix and to have enough growth potential to achieve your goals. If you can’t tolerate the ups and downs of your portfolio, consider a less volatile mix of investments that you can stick with.

3. Be a saver, not a spender

While it’s easy to get caught up in the ups and downs of the market, it’s also important to think about how much of your income you are putting away for the future. Saving early and often can be a powerful force when it comes to making progress toward long-term financial goals.

As a general rule, Fidelity suggests putting away at least 15% of your income for retirement, including any employer match.2 Of course, that number is just a starting point, for some people it will be lower and for some people it will be higher. But regardless, there is evidence that saving more and starting earlier help people reach long-term goals. Every 2 years, Fidelity surveys thousands of Americans who have already started saving for retirement. The results are calculated to give the country a score that shows generally how prepared Americans may be in retirement. In 2023, America’s retirement score is 78,3 down from 83 in 2020. That means that the median person who is saving for retirement is on track to cover 78% of their expenses in retirement.4

The median savings rate for all ages and incomes was 10% in Fidelity’s 2023 Retirement Savings Assessment survey.

Boosting America’s savings rate to 15% could bump up the national average 10 points to 88, solidly in the green.

On the other hand, the median score for a person saving less than 10% was 68. Dedicated savers of all ages had higher median scores but the differences were particularly large for younger savers who had more time to put away money during their careers.2

4. Diversify

Fidelity believes one key foundation of successful investing is diversification (owning a variety of stocks, bonds, and other assets), which can help control risk.

Having an appropriate investment mix, giving you a portfolio that delivers growth potential with a level of risk that makes sense for your situation, may make it easier to stick with your plan through the ups and downs of the market.

Diversification cannot guarantee gains, or that you won’t experience a loss, but it does aim to provide a reasonable trade-off between risk and reward. You can not only diversify among stocks, bonds, and cash, but also within those categories. Consider diversifying your stock exposure across regions, sectors, investment styles (value, blend, and growth), and size (small-, mid-, and large-cap stocks). For bonds, consider diversifying across different credit qualities, maturities, and issuers.

Fidelity’s Retirement Savings Assessment shows that investors whose asset mix is on track seem better prepared for retirement. Fidelity’s 2023 survey found that by replacing portfolios appearing to be either too conservative or too aggressive with age-appropriate allocation could help boost their retirement readiness.5

5. Consider low-fee investment products that offer good value

Savvy investors know they can’t control the market, but they can control costs. A study by independent research company Morningstar® found that, while by no means guaranteed, funds with lower expense ratios have historically had a higher probability of outperforming other funds in their category — in terms of relative total return, and future risk-adjusted return ratings. (Read details of the studyOpens in a new window.)

Fidelity has also found that trading commissions and execution vary greatly among brokers, and the cost of trading affects your returns. Learn more about using price improvement for trading savings.

6. Don’t forget about taxes

Another habit that may help investors succeed is keeping an eye on taxes and account types.

Accounts that offer tax benefits, like 401(k)s, IRAs, and certain annuities have the potential to help generate higher after-tax returns. This is what investors call “account location” — the amount of money you put into different types of accounts should be based on each account’s respective tax treatment. A related concept is called “asset location” — the practice of putting different types of investments in various types of accounts, based on the tax efficiency of the investment and the tax treatment of the type of account.

While taxes alone should never drive your investment decisions, you may want to consider putting your least tax-efficient investments (for example, taxable bonds whose interest payments are taxed at relatively high ordinary income tax rates) in tax-deferred accounts like 401(k)s and IRAs. Meanwhile, more tax-efficient investments (for example, low-turnover funds, like index funds or many ETFs, and municipal bonds, where interest is typically free from federal income tax) are usually more suitable for taxable accounts.

The bottom line

Investing can be complex, but some of the most important habits of successful investors are pretty simple. If you build a smart plan and stick with it, save enough, make reasonable investment choices, and be aware of taxes, you will have adopted some of the key traits that may lead to success.

Sources:

https://www.fidelity.com/learning-center/personal-finance/six-habits-successful-investors

https://twitter.com/Fidelity/status/1657339956883234820/

This information is intended to be educational and is not tailored to the investment needs of any specific investor.

Fidelity does not provide legal or tax advice, and the information provided is general in nature and should not be considered legal or tax advice. Consult an attorney, tax professional, or other advisor regarding your specific legal or tax situation.

About the Fidelity Investments Retirement Savings Assessment:

The findings in this study are the culmination of a year-long research project that analyzed the overall retirement preparedness of American households based on data such as workplace and individual savings accounts, Social Security benefits, pension benefits, inheritances, home equity and business ownership. The analysis for working Americans projects the retirement income for the average household, compared to projected income need, and models the estimated effect of specific steps to help improve preparedness based on the anticipated length of retirement.

Data for the Fidelity Investments Retirement Savings Assessment were collected through a national online survey of 3,234 working households earning at least $20,000 annually with respondents age 25 to 74, from August 14 through September 11, 2019. All respondents expect to retire at some point and have already started saving for retirement. Data collection was completed by Ipsos Public Affairs, LLC using the KnowledgePanel®, a nationally represented online panel. The responses were benchmarked and weighted against the 2019 Current Population Survey by the Bureau of Labor Statistics. Ipsos Public Affairs, LLC is an independent research firm not affiliated with Fidelity Investments. Fidelity Investments was not identified as the survey sponsor.

Fidelity’s Retirement Score is calculated through Fidelity’s proprietary financial planning engine. Of note, Fidelity continually enhances and evolves the retirement readiness methodology, guidance tools and product offerings. This year’s survey processing includes enhancements including, but not limited to, demographic weighting, retirement income projections and social security estimates. To enable a direct comparison, the previously reported Retirement Score results were recalculated using the enhanced methodology. This analysis is for educational purposes and does not reflect actual investment results. An investor’s actual account balance and ability to withdraw assets during retirement at any point in the future will be determined by the contributions that have been made, any plan or account activity, and any investment gains or losses that may occur. For more information on Fidelity Investments® Retirement Savings Assessment, an executive summary (PDF) can be found on Fidelity.com.

1. The account balances and asset allocation data in this story are based on a longitudinal study of active participants in Fidelity record- kept corporate defined contribution savings plans. The data looked at a cohort of 1,470,700 participants who were active in workplace savings plans for the entire period from June 2007 through June 2017. Roughly 1.5% of participants went to 0% equities during the fourth quarter of 2008 or first quarter of 2009. Please note that past performance is not a guarantee of future results and the averages can obscure significant variation for individual account results.

2. Fidelity’s suggested total pre-tax savings goal of 15% of annual income (including employer contributions) is based on our research, which indicates that most people would need to contribute this amount from an assumed starting age of 25 through an assumed retirement age of 67 to potentially support a replacement annual income rate equal to 45% of preretirement annual income (assuming no pension income) through age 93. The income replacement target is based on the Consumer Expenditure Survey 2011 (BLS), Statistics of Income 2011 Tax Stats, IRS 2014 tax brackets, and Social Security Benefit Calculators. The 45% income replacement target (excluding Social Security and assuming no pension income) from retirement savings was found to be fairly consistent across a salary range of $50,000-$300,000; therefore, the savings rate suggestions may have limited applicability if your income is outside that range. Individuals may need to save more or less than 15% depending on retirement age, desired retirement lifestyle, assets saved to date, and other factors. The scores for dedicated savers and less dedicated savers were not adjusted for other potential differences in these two populations.

3. This number represents the median Retirement Score derived from the Retirement Savings Assessment.

4. Retirement Expenses are estimated by Fidelity using replacement rates derived from Consumer Expenditure Survey (CEX). The replacement rate estimation is a function of total pre-retirement income, user selected lifestyle choices (default is average), and effective tax rate corresponding to pre-retirement income. 80% of total estimated expenses are considered essential in nature.

5. Age-appropriate asset allocation involves investing in the right mix of stocks and fixed-income investments to align with one’s risk-tolerance, age and time horizon. Appropriate refers to what Fidelity considers to be an appropriate mix, derived from data reported in the Retirement Savings Assessment about an individual’s equity allocation distribution that is placed into 4 categories, based on that person’s age. Those categories are On track: within 25% on target date equity allocation; Aggressive: an equity percentage more than 25% above the age-appropriate target equity; Conservative: an equity percentage less than 25% below the age-appropriate equity target; as well as a category for assets held in a Target Date Fund.

Past performance is no guarantee of future results.

Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.

In general, the bond market is volatile, and fixed-income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed-income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.

​Fidelity does not provide tax planning or tax advice. Tax-related information provided by Fidelity is intended for educational purposes only. Associates must not navigate a customer’s personal tax situation and should encourage customers to consult an attorney or tax professional regarding their specific situation.

As with all your investments through Fidelity, you must make your own determination whether an investment in any particular security or securities is consistent with your investment objectives, risk tolerance, financial situation, and evaluation of the security. Fidelity is not recommending or endorsing this investment by making it available to its customers.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.

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