Fundamental Determinants of Investment Success

Based on several studies of real world portfolios several factors can be identified that play a major role in investment success or failure. These factors are listed below in descending order of importance.

1. Discipline
By far the greatest determinant of returns for an average investor is having the self discipline to stick to a strict buy and hold policy. Several studies have shown that investors are their own worst enemies, frequently buying high and selling low.   

2. Asset Allocation
The second major factor is an investor's asset allocation (stock/bond mix). For a buy and hold investor the returns are almost completely determined by the asset allocation decision. For this reason great care must be taken in choosing one's asset allocation.

3. Investment Expenses
The third major factor is the annual expense of the investment portfolio. This is by far the easiest factor to control by an investor and there is no reason for an investor to pay more than 0.5% in annual expenses.

4. Tax Efficiency
The fourth major factor is the tax efficiency of the investment portfolio. Investors can increase a portfolio's tax efficiency by investing in very low turnover index funds and holding tax inefficient assets like bonds in tax deferred plans.   

Discipline > Asset Allocation > Investment Expenses > Tax Efficiency