“If you can keep your head when all about you are losing theirs…”
It’s been said about people – especially investors – that “we are our own worst enemies.” Quite often, we trip ourselves up. As humans, we tend to be emotional. We often panic when things go wrong, and we can get too excited when our investments perform well.
Sell low, buy high? No!
Being driven by our emotions rarely ends well. For example, selling investments after they drop in price or buying shares after they rise to new highs is the exact opposite of what we should be doing.
It’s understandable to feel nervous or anxious when markets get choppy, but it’s not in our best interest. We could do well to “be more zen” when it comes to investing.
Quick tips:
• Stay calm.
• Appreciate the impermanence of everything, including the predictable ups and downs of the stock market.
• Be less attached to our possessions and regain control of our emotions.
• Live in the present and try not to dwell on the past or obsess about the future.
• Reflect thoughtfully before acting.
A simple path to investment success
While there are no guarantees, based on my experience and my observations, the following seven practices can help you to achieve your investment goals while doing less and remaining calm.
1. Have a plan and follow it. In the words of Ben Franklin: “Failure to plan is a plan to fail.” By having a plan and following it, you can act more consistently and stay on the path to achieving your investment goals.
2. Ignore the short-term “noise.” Without the discipline of a plan and a consistent approach, it’s easy to get distracted and thrown off by short-term market turbulence. Remember why you are investing and be mindful of how irrational behavior such as overconfidence can lead investors to underperform the market. In their landmark 1998 study, “Boys Will be Boys: Gender, Overconfidence, and Common Stock Investment,” University of California at Berkeley professors Terrence Odean and Brad Barber quantified the cost of trading too often when driven by our emotions.
If you’re a Star Trek fan, think back to Spock and his advantage as a Vulcan of not being influenced by his emotions. Try to be like Spock.
3. Automate your investments. What could be simpler and more effective than automating your investment activities? With automatic contributions to an investment account, you don’t even have to think about whether to invest, how much to invest, or where to invest it. No hesitation. No second guessing. No stress.
4. Buy and hold. Studies have found that asset allocation is by far the most important variable in investing success. That means that individual selection of stocks, bonds, and other securities has relatively little impact on investment performance compared with simply allocating your assets for the long term in accordance with your goals and tolerance for risk. The more you trade, the greater the chance of making poor decisions, and the higher your trading costs and tax liabilities.
5. Use index funds. You can lower your expenses further by using index funds and exchange-traded funds (ETFs), which cost less than actively managed funds. This strategy also removes something called “active risk.” That’s the risk of making suboptimal investment decisions and trailing a benchmark, such as the S&P 500 Index.
6. Consolidate your accounts (and managers). Keep things simple by having fewer accounts whenever possible. It’s also easier to keep track of and manage your portfolio when all of your accounts are at a single investment firm. This way, risk exposures aren’t duplicated unknowingly, and it becomes much easier to track the performance of your entire portfolio.
7. Work with a trusted professional. Having a pro on your side – such as an investment advisor who acts as a fiduciary at all times – can provide the discipline and confidence to be more zen about your money. Under this type of arrangement, you never have to worry about whether the advisor is acting in your best interests or not because they’re legally obligated to do so.
Reflect on what’s most important and enjoy life
To be zen about investing, you don’t need to spend all of your time in the John Denver Sanctuary meditating. Simply turn off the news before your blood pressure begins to rise and enjoy life. As long as you’ve allocated your assets wisely, let time be your ally. And remember to breathe…