SBJ: Be A Disciplined Investor

Industry Insight



Whatever your investment strategy, there will always be distractions to knock you off track. This is especially true right now with markets and economies all over the map, and an expert around every corner—and none of them can agree on what the future holds. Here are a few basic principles of disciplined investing.

Hold tight when markets are volatile: Market downturns are normal, in fact they happen about 25% of the time. But nervously selling shares at a depressed price, thus locking in losses and running up unnecessary trading expenses—is the opposite of a sensible long-term strategy. “Selling low” is rarely advisable unless you’re harvesting a tax loss (an advanced technique). Capitalism is profitable over the long term, and your market investments will participate in that growth if you simply let the markets do their job and don’t get spooked by downturns.

Don’t “chase returns”: it’s easy to find a stock, mutual fund, or market sector that beat the overall markets last year. Moving into those investments now may or may not result in similar performance, because it’s true that “past performance does not predict future results”—and again, the transaction costs of chasing returns may needlessly erode performance. So don’t fall for anyone pointing to performance charts and implying their fund or stock picks will outperform on an ongoing basis. This is a common trick to lure you away from what may be a perfectly sensible portfolio (and/or your current advisor).

Instead, use efficient (low-expense) holdings like passive index funds to build a well-diversified portfolio that matches your risk tolerance and is positioned for the long-term average growth needed to fulfill your goals, and let the markets do the rest.

Ignore the media gurus: Don’t rush to buy “hot” stocks you hear about on TV or radio…and ignore their predictions of market crashes based on news events, Presidential elections, or market patterns. A 2012 study by CXO Advisory Group scored 6,582 predictions by 68 “experts” in the media, and found their success rate to be about 47%...worse than a coin flip! And by the time you complete the purchase of a “hot” stock, the price may have already spiked (ironically in some cases because of a TV guru’s comments), so you may suffer a loss when the price drops back to normal.

One of our favorite clients, Mrs. G, enjoys trips to nearby casinos with her little gang of retired women for some light gambling. She calls us about once a year to ask if she should invest in a new (or existing) stock she heard great things about on TV. Our answer is always the same: a recap of the previous paragraph.

Of course those “pro” tips do pan out sometimes, and Mrs. G never lets us forget it. But likewise we never regret advising her to stick with her efficient, diversified portfolio, which has done well over time. And in many cases those “hot” stocks are already included in one of her funds, with about the weight they’ve earned in the capital markets.

As for predictions of market drops: of course some of them will turn out to be correct because markets do vary, but no one has ever consistently predicted the markets over the long run. Ever. Market timing just doesn’t work.

Instead, always assume the next recession could start tomorrow. Allocate holdings based on your risk tolerance, but protect enough cash from the markets to get you through a recession without having to sell stocks at a low price. Then when markets do drop, remind yourself that you’re prepared, so no reason to panic.

And most importantly, have a long-term investment plan that is primarily centered around your income needs, and accounts for inflation, early death, and other bad-case scenarios. If your plan is on track, you can ignore temporary market swings.

We’re (admittedly biased) fans of working with an experienced financial adviser who can help you plan all the moving parts, and occasionally help you think through pros and cons of portfolio adjustments. If you’re a do-it-yourselfer, you have to carry that important self-discipline load yourself. Don’t make sudden movements before studying hard.

CERTIFIED FINANCIAL PLANNERTM professional Kenny Gott is President at Piatchek & Associates and author of the book "Bottom Line Financial Planning". He can be reached at