It sounds simple, but in reality discipline can be very elusive, especially for “old dogs” like me. College students and new investors actually have the advantage here in that they have not formed years of bad habits… yet.
And they have the potential to avoid them if they learn to be disciplined investors now.
I remember talking with a gentleman a few years back who was lamenting the fact that he and his wife hadn’t listened to me.
He noted that his portfolio had dropped 10% from its peak and was none too pleased for having lost $15,000 despite the fact that he also told me he used 25% stop losses and had a total of $100,000 at risk.
So he cashed out… and promptly missed the 45% run up of the following year.
When I asked why, he replied simply that he didn’t have the discipline to stick it out. And that speaks to something else I frequently cover – being disciplined means staying in the game if you expect to reap the rewards for having played.
I’m not saying you want to do anything stupid like rearrange the deck chairs on the Titanic if the markets are falling.
But you do need to recognize discipline can help you get out of the boat and take the sting out of market gyrations that would otherwise set us on edge and cause us to make boneheaded decisions.
We experience this in strange ways, I noted to the students.
As an example, I asked the students how many of them had moms who suggested they take an umbrella when the skies didn’t look like rain, or pack sunscreen when they headed to the ski slopes on a cloudy day.
Hands shot up all over the room.
My point was that we tend to take risks when we “think” we know better and the unapparent doesn’t appear apparent. By the time it does, it’s too late.
Similarly, we tend to be cautious when the sky has already fallen – not when the clouds are building on the horizon. This is like the people who fail to heed emergency warnings and evacuate in front of a hurricane reasoning that they’ll get out… only to risk being completely wiped out.
In practical terms, it’s easy to invest when the markets are rising.
A monkey throwing darts can do pretty well (and that’s actually been studied and probably on a government grant, too). So can many investors who confuse profits with genius under the circumstances.
But throw in a few down days or months – the markets lose about one year in three over time – and fear threatens to overwhelm discipline.
That’s why it’s a lot tougher to stick it out when things are difficult and rocky.
In closing, I noted to the students that the markets are almost always focused on short-term news – both good and bad. And that the daily gyrations can be wildly exaggerated.
What I really wanted them to take away was this….
The future is not wrapped up in the headlines. Instead it’s almost entirely dependent on the discipline we need to read them…and invest accordingly.
Related Tickers: S&P 500 Index (INDEXSP:.INX), SPDR S&P 500 ETF (NYSEArca:SPY), ProShares UltraShort S&P500 ETF (NYSEArca:SDS).
Keith Fitz-Gerald is the Chief Investment Strategist for Money Map Press
, as well as Money Morning with over 500,000 daily readers in 30 countries. He is one of the world’s leading experts on global investing, particularly when it comes to Asia’s emergence as a global powerhouse. Fitz-Gerald’s specialized investment research services, The Money Map Report
and the New China Trader
, lead the way in financial analysis and investing recommendations for the new economy. Fitz-Gerald is a former professional trade advisor and licensed CTA who advised institutions and qualified individuals on global futures trading and hedging. He is a Fellow of the Kenos Circle, a think tank based in Vienna, Austria, dedicated to the identification of economic and financial trends using the science of complexity. He’s also a regular guest on Fox Business. Fitz-Gerald splits his time between the United States and Japan with his wife and two children and regularly travels the world in search of investment opportunities others don’t yet see or understand.