THE FISCAL BLUE PRINT
WITH COACH JEFF MONTGOMERY
Episode 26: The 7 Habits of Highly Effective Investors
Today we are going to talk about establishing good habits. We’ll look at a study that tells us how long it takes to establish a good habit and then apply that to 7 habits of highly effective investors.
So, grab a note pad and pen and get ready to start taking some notes!
Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you’re a client I can’t give you advice because I don’t know you. Think of this as helpful hints and education only! And please, before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.
(2:00) Practical Planning Segment: On today’s shop were going to talk about the 7 habits of highly effective investors and we might even throw in a few more, so if you’re home get your pad and pen ready to jot these down its going to be a great show. https://jamesclear.com/new-habit
Maxwell Maltz was a plastic surgeon in the 1950s when he began noticing a strange pattern among his patients. When Dr. Maltz would perform an operation — like a nose job, for example — he found that it would take the patient about 21 days to get used to seeing their new face. Similarly, when a patient had an arm or a leg amputated, Maxwell Maltz noticed that the patient would sense a phantom limb for about 21 days before adjusting to the new situation.
Maltz started to think about his own adjustment period to changes and new behaviors, and he noticed that it also took himself about 21 days to form a new habit. Maltz wrote about these experiences and said, “These, and many other commonly observed phenomena tend to show that it requires a minimum of about 21 days for an old mental image to dissolve and a new one to jell.”
(4:00) In 1960, Maltz published that quote and his other thoughts on behavior change in a book called Psycho-Cybernetics (audiobook). The book went on to become a blockbuster hit, selling more than 30 million copies. And that’s when the problem started.
You see, in the decades that followed, Maltz’s work influenced Zig Ziglar, Brian Tracy, Tony Robbins. And as more people recited Maltz’s story — like a very long game of “Telephone” — people began to forget that he said, “a minimum of about 21 days” and shortened it to, “It takes 21 days to form a new habit.”
And that’s how society started spreading the common myth that it takes 21 days to form a new habit (or 30 days or some other magic number). It’s remarkable how often these timelines are quoted as statistical facts. Dangerous lesson: If enough people say something enough times, then everyone else starts to believe it.
(5:15) How Long it Really Takes to Build a New Habit. Philippa Lally is a health psychology researcher at University College London. In a study published in the European Journal of Social Psychology, Lally and her research team decided to figure out just how long it actually takes to form a habit.
The study examined the habits of 96 people over a 12-week period. Each person chose one new habit for the 12 weeks and reported each day on whether they did the behavior and how automatic the behavior felt.
Some people chose simple habits like “drinking a bottle of water with lunch.” Others chose more difficult tasks like “running for 15 minutes before dinner.”
(6:20) On average, it takes more than 2 months before a new behavior becomes automatic — 66 days to be exact. And how long it takes a new habit to form can vary widely depending on the behavior, the person, and the circumstances.
In Lally’s study, it took anywhere from 18 days to 254 days for people to form a new habit.
In other words, if you want to set your expectations appropriately, the truth is that it will probably take you anywhere from two months to eight months to build a new behavior into your life — not 21 days.
(8:00) 7 habits of highly effective investors:
- Invest early and often: successful investing takes time because of the power of compounding.
- 20 yr. vs 35 yr. old: For example, invest $3,000 every year starting when you’re 20 years old and, if you retire after age 65, you will have accumulated almost $680,000 (assuming a 6% annual growth rate and no tax). If you wait until age 35 and start saving $3,000 annually, you’ll accumulate only about $254,000. And, if you wait until age 45 to start saving, you’ll accumulate only about $120,000 by the time you retire.
- It’s never too late to start. As a matter of fact, if you’re over 50 you are allowed what are called “catch up contributions” if you have earned income.
- For an IRA account individual over 50 can contribute an additional $1k over and above the 6000 max amount: total of $7,000 for 2019
- 401k account max contribution is 19,000/yr. over if over 50 add an additional 6000 for a total of $25,000
- Rule of 72: take the number 72 and divide by any interest rate and you’ll come up with the number of years it takes to double your money.
- Save more: investors spend less than they make and invest the difference. Reducing expenses by $200 per month and investing those funds. 8% yr. return an investor could amass 700k over 40 years. No think about that if you are in your 20’s
- Can you change your spending habits by just $200 per month? I bet you could.
- YOLO mindset
- Don’t try to market time: the average investor typical buys high and sells low. They buy with confidence when the market is rising and then they sell with fear as it falls. We saw this just this year in the month of August. SP500 lost about 3% in August of 2019. Overall, passive U.S. equity funds saw approximately $900.0 million in outflows while active U.S. equity funds had $18.9 billion in outflows.
- Keep fees to a minimum: we’ve talked in the past about fees and specifically hidden fees. I love this line by Robert Berger” fees are to investments what termites are to a home”. Fees seem small at first but can slowly eat away at your returns. So effective investors choose a low-cost strategy to invest. Active vs passive
- Prefer asset class funds: better than index funds are asset class structured funds that invest in an asset class.
- Index funds are a better choice than active funds but Reconstitution of Index
- Over the long run their performance beats most active manage funds: SPIVA study; over 5yrs ending 12/31/2018……… 82.14% of Large Cap active managers failed to beat the index and 94.39% of Small Cap Value active managers failed to beat the index.
- Low turnover, ideal for taxable accounts; doesn’t trigger unnecessary cap gains
- Stay Disciplined and Rebalance: this is critical. Studies show that simply rebalancing your portfolio periodically can add 1 to 2% to your returns on average.
- It starts with designing a structured portfolio that mimics the entire market. So highly diversified and based on your individual risk preference.
- Asset class move up and down in price
- Risk Management helps with the discipline component
Fidelity reportedly conducted an internal study—a performance review of accounts between 2003 and 2013 to find which accounts did the best.
They found that the best performing accounts were from investors who were DEAD! In second place were investors who had FORGOTTEN they had accounts at Fidelity.
This was an internal study that made its rounds when asset manager James O’Shaughnessy relayed it on Bloomberg radio. However, it’s certainly not the first study to show that lazy portfolios work. Over time, slow and steady seem to win the race when it comes to investing. While active investors will tell you it’s possible to time the market and make a killing by playing stocks, the data seems to show otherwise, there is something to be said for set and forget investing.
- Use 3rd party custodian: Protects you from investment fraud.
- Advanced technology protects you from investment fraud:
- Insurance carried by custodians protects you from fraud
- Monthly statements; they must report all activity directly to you
- Withdraws are sent directly to you or direct deposited into a linked bank account
“We appreciate you joining us today for this episode of The Fiscal Blueprint.
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Remember it’s not about the money but about your life!
Having a mindset and living a life of abundance rather than scarcity will change the direction of your life forever!! Enjoy the Journey!!!