"There's an idiot in every trade, and if you don't know who it is, you're in trouble," quips Meir Statman.
Mr. Statman, a professor of finance at Santa Clara University, has been studying investors' behavior for decades and he's seen his fair share of meltdowns. Still, none of this negates the simple fact that some investors and traders have more success than others. What's the difference between winners and losers?
A recent survey by Fidelity examined the trading habits of its 1,000 top performing customers. Respondents were traders making 36 or more trades in the past year who earned at least 20% on their portfolio.
Here's the five attributes that defined the winners:
They established reasonable expectations
Setting achievable goals is a defining hallmark of successful traders. Expectations should always be in line with what's realistically possible. According to Fidelity, 64% defined investing success as a positive total gain their portfolio while 31% said it was beating a market index or benchmark.
They understand risk
How well do you know yourself? No two investors or traders will have identical levels of risk tolerance. And it's okay to take more risk, but only if you fully comprehend what's at stake.
Almost two-thirds of Fidelity's top traders surveyed were willing to take higher risks in exchange for the possibility of higher returns. This strategy paid off last year, as U.S. stocks (SPY - News) gained 16% whereas the total U.S. bond market (BND - News) only gained around 4.21%.
They like hot sectors
Overweighting top performing industry sectors (and avoiding lagging ones) is one typical strategy used by traders.
According to Fidelity, top traders were comfortable allocating up to 52% of a hypothetical $100,000 portfolio to just three sectors; energy (XLE - News), technology (QQQ - News), and consumer staples (XLP - News).
Although tech and energy has lagged the broader market in 2013, consumer stocks have led the stock market to new highs this year. (Video: Trading Commission Free ETFs? Avoid these mistakes)
They don't quit
While the 2008-09 financial crisis may have scared off many people from investing, it didn't keep top traders from reentering the market. Last year, top traders kept just 15% of their portfolios in cash, while the rest was invested in stocks and other asset classes.
They do their own research
Keeping abreast on the market and being educated is something we can all be better at. According to Fidelity, 39% of its surveyed participants said they conduct their own research to stay ahead of the pack.
Other Interesting Tidbits Top-performing active traders maintained significant exposure to "risk assets," including investment vehicles like call and put options. At the time of the survey, this group had:
--57% allocation to stocks, 10% to bonds, 9% to real estate, 7% to options on average;
--47% of respondents used options as part of their investment strategy;
--15% plan to increase their exposure to ETFs.
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