This feels like a topic we’ll never get away from, no matter how old we get. It follows us everywhere. We heard it from our mothers, our teachers, our coaches. Throughout life, it was: discipline, discipline, discipline. Nowadays, we preach it to our own kids or grandkids, but do we actually practice it ourselves? It depends. I probably don’t seem like the disciple of discipline here on Earth when it comes to how many hotdogs I eat at a barbecue. But when it comes to the market, I’ve learned that the difference between disciplined investing and non-disciplined investing is the same difference between making mistakes and making money. I think we would all choose the latter. In that case, it’s time to start designating discipline to the market, your money, and the way you manage them together.
Patience is a virtue - as in it is virtually impossible to have it once you start to notice those big dips we discussed in the previous blog posts. I get it, trust me. Patience is something I also had to master over time, but patience pays off, and here’s why:
Bad Investment Behavior
Want to know the key to bad investment behavior? Emotion. Scholars, sellers, and stock investors have spent years studying the chink in the armor of a solid investment plan, and it turns out that the biggest threat to its safety is the man inside the suit.
Humans react emotionally, and whenever we sense a threat, we tend to do our best to protect ourselves at the moment. When it comes to the market, however, protecting ourselves at the moment is usually a lot like putting our hands on the flames to try and snuff out the fire. It does more harm than good.
When we devise your financial plan, it’s important to keep in mind that it is designed to do its best in the long term. Since the “long-term” means prolonged periods of time, we know that there will be alternations between highs and lows as the days drag on. Any assumption otherwise would be an assumption that the market has mutated overnight into something stable, stagnant, and ultimately supernatural - since this would never happen.
There are few things that investors and advisors can predict when it comes to market movements, but the one thing we do know is that - it will move eventually. Whether that is up or down is unknown, but you can count on it to occur. Chances are, your financial plan depends on that, too. This means any last-minute, emotional changes you make to your investments will be made blindly and will rarely be of any benefit. Sticking to the strategy we set up for you is the best way to prepare for volatility and safely see yourself through the ups and downs.
Dollar-Cost-Averaging
The same way we used equity diversification to represent the rise and fall of the market rollercoaster, we will use dollar-cost averaging to show you why it is important that you stay on the ride.
Dollar-cost-averaging is a real-world example of why discipline and patience work when it comes to investments. Here’s why:
The principle behind dollar-cost-averaging is that you invest a set amount of dollars at consistent and predetermined intervals. So, let’s say you decide to invest $10 every month into what we’ll call the sock stock. If you enter the market when prices are five dollars per share, you’ll buy two shares. Next month, let’s say people are buying fewer socks than usual, and the price per share drops to one dollar. Dollar-cost-average requires discipline, and it means that you will continue to invest your predetermined ten dollars, ignoring the scary dip in prices. You now have twelve shares of the sock stock.
Later on, a sock shortage shocks the country (try saying that ten times fast), and as their demand rises, so does their price per share. One share is now ten dollars, and you buy your single share with the designated ten dollars you have set aside.
Because the price of the shares increased and decreased as time went on, the average price you paid per share came out to $5.33. That’s slightly higher than the price you paid for your first set of shares when they were five dollars, but it is lower than the price of the shares when they were at their highest of ten dollars. That is because dollar-cost-averaging makes it so that you automatically buy more shares when the price is low and fewer shares when the price is high. Over time, the value of your investments will likely be higher than the total amount you have contributed.
Obviously, these are exaggeratedly low numbers on an exaggeratedly short timeline, but they represent the process behind how patience can pay off.
Long story short, the market will always move. Your best bet for surviving these surges and setbacks is to accept the fact that they will happen and remain disciplined when they do. There might actually be more to gain from letting things go than from trying to control them.
Until next time!
Source: https://www.investopedia.com/articles/basics/10/how-to-avoid-emotional-investing.asp