The Importance of Discipline in Investing

Nov 5, 2013 11:15:39 AM / by Jason Shaw

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Once you have evaluated your goals and developed a strategy to reach them, it is vitally important that you exercise the discipline to adhere to the strategy that you’ve put in place.  Investing can be an emotional business, and the temptation to deviate from your plan can be strong.  When emotion creeps into your investment decision-making, remember that you have arrived at your plan through sound reasoning and that sticking to it is the best way to ensure that you meet your investment goals.

Remember Why Your Strategy Is Important.

To Meet Your Goals

Remember that you have developed your strategy with your specific savings goals, your risk tolerance, and your time horizon in mind.  You should reevaluate these elements regularly to make sure your strategy remains sound as circumstances change throughout your life.

To Minimize Risk Through Diversification

A sound strategy involves appropriate diversification of your investments.  The emotion of the moment can tempt you to concentrate assets in a particular sector, but doing so increases your risk of catastrophic loss.  According to Jim Cramer of CNBC’s Mad Money, you should never have more than 20% of your portfolio in stocks of the same sector.  Diversification ensures that you can take advantage of unanticipated gains as well as minimize the sting of your losses.

To Minimize Costs

Also remember the value of minimizing costs.  The development of your plan should include a calculation of investment costs.  Deviating from the plan can increase these costs, particularly if you begin buying and selling assets more frequently than you had planned.  Keeping costs down is essentially equivalent to contributing more money to your fund.  Both actions have a pronounced positive impact on your fund’s growth over time.

 

Resist the Temptation of Emotional Decisions.

Failing to Rebalance

It can be tempting to put off rebalancing your asset allocation based on current market conditions.  After all, why would you want to sell stock that is performing well?  In a bull market, the share of your portfolio devoted to stock will increase.  This seems great in the moment, but failing to rebalance regularly exposes you to increased risk of loss when the market turns.  Conversely, selling off stocks in a bear market can exclude you from gains when the market rebounds.  Even the experts cannot reliably predict market movements.  The most consistently reliable strategy is to keep your portfolio balanced according to your goals, risk tolerance, and time horizon.

Market Timing and Chasing Winners

Another temptation is the allure of market timing.  If only we could gain just the right insight to buy or sell at just the right moment, we could make a killing.  This seems very doable in hindsight, after a market event.  In fact, however, predicting the market is difficult at best, even for experienced professionals.  Attempting to outperform the market with timed transactions is not only a difficult game to win; it is one that can result in catastrophic losses.  To have the best chance of meeting your investment goals, resist the urge to stray from your plan because you think you see a golden window of opportunity.

You might also be tempted to alter your strategy by putting money into investments with strong recent performance.  The fact is that the current performance of a particular investment is not at all a reliable indicator of future performance.  Once an investment starts looking strong, you have already missed out on the growth that gave it that reputation.  Constantly chasing yesterday’s winner can drain your resources and brings no assurance of return.

 

Hold to Your Strategy, and Invest Steadily.

The single best way to meet your investment goals is to develop a sound plan and stick to it with steady, increasing contributions.  Even well above-average market returns are unlikely to increase your fund’s performance as much as increasing contributions, minimizing costs, and adhering to your plan.

 

Boelman Shaw Capital Partners in Des Moines is an independent financial consulting company.  Rather than selling particular investments, we get to know our clients individually and provide professional advice on the best investment options available to them, based on their unique circumstances.  Because we provide tax planning as well as financial planning services, we can give our clients more complete and thoroughly informed advice about how to get the most out of their investments, considering both the investments themselves and how they fit into the clients’ total tax picture. Click on the button belowf to start developing a sound investment strategy to help you meet your financial goals.

Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.

Topics: Financial Planning

Written by Jason Shaw