The 5 Most Important Habits of Successful Investors

If you've started investing, or you're planning to start soon, it's one of the best money moves you'll ever make. Investing is a powerful way to build wealth -- but your results will depend on how you invest. Successful investors tend to follow several important habits. By taking the same approach, you'll get better results from your portfolio.

1. They invest in what they understand

Legendary investor Warren Buffett says to never invest in a business you don't understand, and it's sound advice. You don't need to be an expert on every facet of the business. But before you invest in anything, you should research it and be able to explain what it is.

The same is true with things like index funds, which are an easier and better option for most investors. If you're going to invest in one, make sure you understand what that fund invests in. For example, I invest in a total stock market fund. I know by investing in that, I get exposure to the entire U.S. stock market.

Don't invest in companies on a whim, or based on a tip from an acquaintance or on social media. Successful investors always do their own research before committing their money.

2. They buy and hold

Investing is simpler than a lot of people realize. All you need to do is:

• Pick quality investments that you expect to grow in value.
• Invest your money in them.
• Hold your investments for at least five to 10 years.

The reason the buy-and-hold strategy works so well is because the stock market has historically grown over long periods of time. From year to year, it can be volatile. But if you zoom out, the average stock market return is about 10% per year.

Investors who frequently buy and sell stocks often lose money because it's impossible to time the market. Investors who buy and hold don't need to worry about what happens in the short term because they're investing for the long haul.

3. They invest on a regular basis

You can make money off a single investment. Let's say you invest $10,000 in a fund that tracks the stock market, and it grows by 8% per year. After 30 years, you'll have $100,627 -- certainly nothing to complain about.

But the most successful investors do it consistently and turbocharge their results. Let's say in addition to that $10,000 investment, you also decide to put in $500 per month. After 30 years, now you end up with $780,326.

Don't just invest once, or whenever you feel like it. Decide how much you can afford to invest per month and make it part of your routine. With many online stock brokers, you can set up automatic investments so you don't need to remember to do it.

4. They manage risk well

Risk is part of investing, but the best investors are careful not to take on too much of it. Here's how to manage risk with your portfolio:

• Keep most or all of your portfolio in stocks and bonds. Stocks are more volatile, but as explained earlier, they generally do well over long periods of time. Bonds don't provide the same return as stocks, but they're low risk. It's recommended that you keep most of your portfolio (90% or more) in stocks while you're young, and shift some of that to bonds as you get closer to retirement.
• Build a diversified portfolio. Don't put all your money in a small number of companies. A diversified portfolio has at least 25 stocks across a variety of industries (tech, healthcare, energy, etc.). Or, you can buy index funds -- these invest in a large number of companies for you.
• Avoid high-risk investments. If it's high risk and supposedly high reward, watch out. Examples include futures, options trading, and cryptocurrencies. If you want to dabble in high-risk investments, use no more than 5% to 10% of your portfolio for that.

5. They're responsible with their finances

Investments are one part of personal finance. They're a very important part, but they're not the only thing you should focus on. Successful investors know that if they're not in a stable financial position, that can negatively affect their investments.

For example, if you put all your money in investments and neglect an emergency fund, you'll be unprepared for emergencies. When an unexpected bill comes up, you might need to sell your investments to pay for it.

In addition to investing, it's also important that you:

• Build an emergency fund: Aim for at least three to six months of living expenses.
• Pay off credit card debt: Credit cards have an average interest rate of over 20%. That's more than you can reasonably expect to gain from any investment, so if you have credit card debt, paying it off should be your priority.
• Have a plan for your money: Make sure you have savings and investing goals, such as saving $500 and investing $500 every month.

These five habits will set you up for success as an investor. It doesn't happen overnight, but if you stick with it, you'll be well on your way to long-term wealth.