When I was growing up, the word “discipline” conjured up unpleasant visions of time-outs, getting grounded, losing privileges—you name it.
But those are all consequences, the results of a lack of discipline. The positive side of discipline is in the rewards for maintaining it. We see those benefits everywhere, from maintaining a regular workout schedule to brushing your teeth every day.
Managing one’s finances can involve a great deal of discipline, and this is nowhere more true than in managing investments.
I’m writing this in early April, so by the time you read this, the world may have settled down a bit. But even if it has, these lessons will always be important. Here’s what I learned during the war with Iran.
Even with decades of experience, my humanity becomes apparent in times like these. I read the same headlines as you, have the same fears as you, and—when it comes to managing investment portfolios—have the same impulses as you.
As an investor, what the recent war showed me is the brutal mistake of reacting to events in real time. It’s clear from watching markets that a great many participants, some with large amounts of money, do exactly that. They sell on bad news and buy on good news—the most established way to lose money that I can think of. To my mind, this has never been so true as in recent months. If you reacted to headlines, you were selling at low prices and buying at high prices.
So what do you do?
You could decide that if selling bad news and buying good news has been the wrong thing, then doing the opposite would be the right thing. But if you tried to do that, be aware that it takes nearly perfect timing to pull it off. Not impossible, but close to it.
Both of these reactions to the market can be highly emotional. If you’re like many investors, you’re playing with your life savings. So maybe 1) you don’t want to play any games, and 2) you’d like a little less emotion. Here’s how you do it.
- Set up the asset allocation that matches both where you are in your life and your goals. Certified Financial Planners are really good at this. It’s their wheelhouse.
- Once you have your asset allocation, build a portfolio. Think of your asset allocation as your portfolio’s outline. You still need to write the story. That’s where portfolio building comes in.
- Once your plan is in place and your portfolio is built, stick to it. This is the discipline part that we discussed earlier— and it might be the hardest part of the whole process. Entire industries are aligned against you. The most significant one is something we all interface with—the news media. I don’t care what your information source is, the news media thrives on bad news. They’re in the business of getting you to pay attention, and nothing gets attention like bad news. Every day, all day long, we investors are being told about how bad things are or how bad they’re going to get.
A few more comments on this last point. No matter what you do, you are at risk. The only difference is how much risk. You might say that if you put your money under your mattress—assuming it’s not vulnerable to being stolen—then it’s not at risk, right? Wrong. Cash is at risk of losing purchasing power. Have you noticed the price of gas lately? Okay, maybe that’s temporary, but the car you’re putting that gas into costs a lot more today than it did a decade ago. It almost doesn’t matter what you look at, it costs more to buy today than it did at some point in the past. Cash under the mattress has been losing purchasing power.
For most people, the more you are at risk, the more vulnerable you are to emotions. And you really cannot be emotional in the world of investing.
This is where discipline means everything.
You read about the war. What do you do? Nothing. You’ve already done it. But the hard part is sticking to it. And this is why having discipline at these times is so hard. Because while you’re being pounded with bad things in your news feed, you also know that just because something has worked in the past, it doesn’t mean it will work this time. The best we can hope for is that something that has usually worked in the past will work again for us this time. But it might not.
So what do you do if you can’t be disciplined? Get a financial professional to manage your investments. Take your emotions out of the equation.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal@getyourinsight.com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.