I’ve said it a million times but I will say it again. Having any investment discipline is better than having none at all.
The average individual investor follows trends. Which means they are often selling at the bottom and buying near the top. A 2010 study by Dalbar revealed that the average equity fund investor underperformed the Standard & Poor’s 500 by a whopping 5.31% annualized over the previous 20 years. That’s real money.
In my book “The Women’s Guide to Successful Investing,” I devote an entire chapter to developing an investment discipline that meets your risk tolerance and personality biases. For example, I tend to be a late adapter – I have yet to establish a Netflix account – and I don’t like to pay up for stocks. These traits are consistent with the value investing style. Growth investors are early adapters and are proficient in the latest technologies and aware of the most current trends; they tend to be comfortable running with the fast crowd. Value investors are more inclined to move against the crowd.
Of course, there are variations of the two disciplines I describe, but the point is: Both disciplines are valid. Both shine during different stages in economic cycles. And both will generate solid returns if investors remain committed to their chosen approach. Staying the course is key, yet the research shows that most investors give up right when they should consider doubling down.
When I have strayed from my own discipline, I have incurred epic losses. Here are three principles to remember:
- Do not take stock tips from people whose investing prowess is unknown to you – this is gambling, not investing. Over the years, I have acted on stock tips from complete strangers and interested parties yet ignored the recommendation of a world-class investor known to me. Talk about zigging when you should zag. I’ve made every mistake; I’d rather you didn’t. Buy what you know and companies you’ve researched according to your discipline.
- Absolutely do not, ever, chase stocks you believe you should have bought and didn’t. If you missed a stock a lower price and are distressed by watching it rise, resist the temptation to chase it. Professional investors understand the stock market is a tug of war between fear and greed. We want to buy from fearful sellers and sell to greedy buyers. Not the other way around.
Recencyeffect is the tendency to extrapolate the most recent trend into infinity. It keeps us from adding to holdings when markets are weak (the weakness will continue) and selling into strength (I will miss potential returns if I sell now). When the market is rising or falling, the longer it does so the greater the probability it will cease doing so (or revert to the mean), but the average investors hasa hard time acting on this knowledge. When you’ve done your research, don’t capitulate.
- Learn to leverage your natural expertise and preferred discipline. Trust yourself. Investing, I have learned, produces a perpetual state of dissatisfaction. If I bought shares and they declined, I bought too much. If I sold and the shares appreciated, I sold too much too soon. But over the long term, we know that being invested in great companies we can own for a lifetime will cover many errors and produce compelling returns.
Investing is about being mostly right and requires courage and discipline. Don’t fall off the wagon. But if you do, get right back up, and get to work.