Keith Fitz-Gerald:  I was taken aback by the question: “What is the single most  important investment I can make right now?” Not by the question itself – I get that one a lot.

But because of who was asking it and what they excluded.

It was put to me by Jason, Susan and Hao – all of whom are  juniors at Skidmore College where I was lecturing last week.

They wanted to know what they -  as college students - could do to ensure their financial future.

Not only that, but they specifically asked me to exclude specific investment choices that a more seasoned, older investor would  consider.

I thought about it for a few minutes, then responded: “It’s  discipline.”

Investors are faced with a unique challenge, I  explained. Many are not at the mercy of  the markets as they believe, but are actually subjected to the whims of the  person they see in the mirror every morning.

That’s why consistent investment results are often more  dependent on behavior than actual performance.

Put another way, investors who “behave” themselves by being  disciplined tend to do far better than those who don’t.

Beating the Markets Takes Discipline

For example, DALBAR, a Boston-based research firm ,released a 2011 report that showed investors had achieved a mere 41.9% of the S&P 500‘s  performance over the twenty years ended December 31, 2010.

In other words, investors managed to leave a staggering  58.1% on the table.

According to the report, the average investor achieved a  mere 3.8% a year versus the 9.1% annualized return of the S&P 500 because  they tended to jump in and out of the markets at the worst possible moment depending on their emotions.

This reinforces something I talk about all the time in my  presentations around the world – investors lose billions by trying to time their decisions based on nothing more than greed, fear or simple paralysis.

In my opinion, it’s why the single biggest investment anyone  can make is “discipline.”

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).

 

Written By Keith Fitz-Gerald From Money Morning

 

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.

 

 

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