The most successful investors were not made in one day. Learning the ins and outs of the financial world - and your personality as an investor - takes time and patience, not to mention trial and error. In this article, we'll lead you through the first seven steps of your expedition into investing and show you what to look out for along the way.

1. Getting Started
Successful investing is a journey - not a one-time event - and you'll need to prepare yourself as if you were going on a long trip. What is your destination? How long will it take you to get there? What resources will you need? Begin by defining your destination, and then plan your investment journey accordingly. For example, are you looking to retire in 20 years at age 55? How much money will you need to do this? These are questions you must first ask yourself; the plan that you come up with will depend on your investment goals. (To learn more, please see Having A Plan: The Basis Of Success.)

2. Know What Works
Read books or take an investment course that deals with modern financial ideas. The people who came up with theories such as portfolio optimization, diversification and market efficiency received their Nobel prizes for good reason. Investing is a combination of science (financial fundamentals) and art (qualitative factors). Science, however, is a solid place to start and should not be ignored. But don't fret if science is not your strong suit: there are many texts, such as "Stocks For The Long Run" (1994) by Jeremy Siegel, that explain high-level finance ideas in a way that is easy to understand. (For further reading, see Ten Books Every Investor Should Read and Is finance an art or a science?)

Once you know what works in the market, you can come up with simple rules that work for you. For example, Warren Buffett is one of the most successful investors ever. His simple investment style is summed up in this well-known quote: "If I cannot understand it, I will not invest in it." It has served him well. While he missed the tech upturn, he avoided the subsequent devastating downturn of the high-tech bubble of 2000. (To read more, see Warren Buffett: How He Does It and What Is Warren Buffett's Investing Style?)

3. Know Yourself
Nobody knows you and your situation better than you do. Therefore, you may be the most qualified person to do your own investing - all you need is a bit of help. Identify the personality traits that can assist you or prevent you from investing successfully and manage them accordingly.

A very useful behavioral model that helps investors to understand themselves was developed by Bailard, Biehl & Kaiser.


The model classifies investors according to two personality characteristics: method of action (careful or impetuous) and level of confidence (confident or anxious). Based on these personality traits, the BB&K model divides investors into five groups:

  • Individualist - careful and confident, often takes a "do-it-yourself" approach
  • Adventurer - volatile, entrepreneurial and strong willed
  • Celebrity - follower of the latest investment fads
  • Guardian - highly risk averse, wealth preserver
  • Straight Arrow - shares the characteristics of all of the above equally
Not surprisingly, the best investment results tend to be realized by an individualist, or someone who exhibits analytical behavior and confidence and has a good eye for value. However, if you determine that your personality traits resemble those of an adventurer, you can still achieve investment success if you adjust your strategy accordingly. In other words, regardless of which group you fit into, you should manage your core assets in a systematic and disciplined way.

4. Know Your Friends and Enemies  
Your friends may be reliable investment books, reputable media and investment professionals with experience, long-term perspective and integrity. However, beware of false friends who only pretend to be on your side, such as certain unscrupulous investment professionals whose interests may conflict with yours. You must also remember that as an investor, you are competing with large financial institutions that have more resources, including greater and faster access to information. (See Choosing An Advisor: Wall Street Vs Main Street and Shopping For A Financial Advisor.) 

Bear in mind that you are potentially your own worst enemy. Depending on your personality, strategy and particular circumstances, you may be sabotaging your own success. If you are a guardian and you see all your friends making a ton of money in the short term on the latest market craze, you would likely be going against your personality if you joined in (see How Investors Often Cause The Market's Problems). Because you are risk averse and a wealth preserver, you would be affected far more by large losses that can result from high-risk, high-return investments. Be honest with yourself - identify and modify factors that are preventing you from investing successfully or are moving you away from your comfort zone.

5. Find the Right Path
Your level of knowledge, personality and resources should determine the path that you choose. Generally, investors adopt one of the following strategies:

  • Don't put all of your eggs in one basket. In other words, diversify.
  • Put all of your eggs in one basket, but watch your basket carefully.
  • Combine both of these strategies by making tactical bets on a core passive portfolio.
Most successful investors start with low-risk diversified portfolios and gradually learn by doing. As investors gain greater knowledge over time, they become better suited to taking a more active stance in their portfolios (i.e. tactical bets).

(For further reading, see Portfolio Protection In Diversification And Discipline and Asset Allocation Strategies.)

6. Be Disciplined
Sticking with the optimal long-term strategy may not be the most exciting investing choice. However, your chances of success increase if you stay the course without letting your emotions, or "false friends", get the upper hand. (To read more, check out Ten Tips For The Successful Long-Term Investor.)

7. Be Willing to Learn  
The market is hard to predict but one thing is certain: it will be volatile. Learning to be a successful investor is a gradual process and the investment journey is typically a long one. At times, the market will prove you wrong - acknowledge it and learn from your mistakes. When you succeed, celebrate.

Conclusion
What you achieve as an investor will depend on your goals, but sticking to these seven simple steps will help keep you on the right path. Bon voyage!