While many self-directed investors understand that managing their own money can involve a great deal of responsibility and work, many do not realize the important skills they need to commit to mastering in order to succeed.  Certain investors want to “dabble” or learn to trade with what they often characterize as “fun money” however losing money or hurting your portfolio’s performance is no laughing matter.

Regardless of whether you are a novice or an expert, everyone who manages a portfolio faces the same challenge of maximizing the returns on their capital while effectively managing risk.  While the finer points are certainly different between multibillion dollar fund managers and everyday self-directed investors, there are three core characteristics that all successful investors share.

Diligence

Great investors and traders are always willing learners. While one of the key differences between experienced and novice investors is the length of time it takes to do sound research and analysis, all successful investors still have to do their homework.

Investing and trading involves doing a lot of research and so becoming both fast and accurate in making assessments will make doing that homework much more manageable. Getting to that point, however, takes time.

The process of scanning through possible opportunities, monitoring your portfolio’s performance and paying attention to the markets are just some of the tasks successful investors are willing to make part of their routine because ultimately the payoff justifies the investment.

Decisiveness

Conducting research and performing analysis are necessary when managing investments. Just knowing what might be good opportunities or bad ones isn’t enough to cut it in the hyper-competitive investment landscape – success requires action.

Being able to act on the research and evaluation is an incredibly important but difficult skill to master.  Successful investing is about making sound choices and acting quickly when those choices turn out to be incorrect.

Too often investors fall confuse getting more information with a safer decision. On the one hand, there are those that succumb to ‘analysis paralysis’ and seek out more information instead of taking action.  Unfortunately, more information doesn’t equate to better outcomes.

On the other hand there are those who do not act quickly enough to get out of a losing position and seek out information that validates staying on the ship even though it is clearly sinking.

Investing is about being able to take educated guesses (i.e. decide in the face of uncertainty) and manage risks.  As with any skill, being decisive in the face of uncertainty requires practice and a willingness to make mistakes and learn from them.

Discipline

Discipline is probably the most widely cited skill that is required for successful investing.  While identifying and acting on opportunities that make sense is important, staying rational and focused is a challenge for many self-directed investors.

Managers of multibillion dollar funds have entire teams devoted to ensuring the decisions they make are within acceptable risk and reward limits.  These resources are justified given the amount of money that is at stake and are put in place to ensure that rationality trumps emotion. Even with all of those controls and boundaries in place, however, fund managers chase returns or deviate from their plans and investment strategies can off the rails.

Without a risk-team warning them about their decisions, self-directed investors have to become adept at developing or finding successful trading rules and then sticking to them.  The process of developing these trading rules and learning about their own personal strengths and weaknesses as an investor is where a lot of individuals stumble or give up, and understandably so. It takes a certain mindset to persevere against a teacher as fickle as the infamous ‘Mr. Market’.

The Bottom Line

Successful self-directed investing is deceptively simple. While managing one’s own financial destiny can be both exciting and unnerving, it most definitely involves lot of work and a great deal of learning.  Being diligent, decisive and disciplined involves constant practice and challenge.  Like muscles, these skills require measured development and constant exercise to truly become a source of strength.  As such, it is important for anyone considering investing on their own to be able to manage their expectations accordingly. Developing these skills takes time and tenacity but as all successful investors and traders know, the reason to do it is simple. The reward justifies the investment.