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Investment Discipline: Why Discipline Trumps Luck

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Investment Discipline: Why Discipline Trumps Luck

Posted on:
October 21, 2021
Time to read:
4 minutes

“There are no limitations to the mind except those we acknowledge. Both poverty and riches are the offspring of thought.”Napoleon Hill

I’m struck more and more by the importance of the right mindset in the tasks we set for ourselves. So often, we don’t achieve the things we want simply because we’ve gotten in our own way.

I know that’s been true in my life and I’ve seen it happen to my clients at times as well.

I’ve come to believe there are 3 essential mindsets that manifest themselves in very specific behaviors that are absolutely essential to achieving investment success: patience, faith in the future and discipline. In this article, we’re going to talk about discipline and the specific ways it manifests itself in successful investing.

Mindset: Discipline

Successful investing, whether it’s for retirement, education, building family money, or anything else, always starts with a plan. In that plan you’ll determine all the steps you’ll have to take to reach your financial goals. Once you know those steps, you have to have the discipline to continue doing the right things and continue avoiding the wrong things over and over for years and decades.

I see discipline come and go in people’s ability (or willingness) to save. Family wealth, like a family business, is built by finding what has worked over time, adapting it to fit your goals, and sticking with it for the long term. That time horizon can also be one of the biggest reasons people don’t get there. It’s boring to do the same thing year in and year out to reach our goals.

Financial planning, intelligent, long-term portfolio management, and regularly funding it throughout your career is the most reliable path to real wealth…but the results only show up after decades.

Meanwhile, most people you know will be saving virtually nothing and, instead, spending on highly visible status signals: new cars, exotic vacations and  nicer tech. It’s easy to feel like you’re missing out. It’s easy to let that savings discipline slip. Most people do. That’s why most people in America are not on track to build true wealth, they’re on track to eventually run out of money.

Maintaining discipline is what keeps that from happening to you.

Behavior: Investment Strategy Discipline

“Shiny object syndrome” is a huge problem for most people’s investment management strategy.

We can spend all kinds of time and energy developing a rational, long-term, goal-focused plan to achieve the life we want, but if we don’t stick to the investment strategy that comes from that plan, we’ll never get there.

discipline in investing

True multi-generational wealth is achievable, but it won’t happen by constantly chasing the next hot thing.

Wall Street is always pitching new investment “products” for us to chase: tech stocks in the late 90’s, real estate in the 2000’s, options, futures, private equity, hedge funds, limited partnerships, swaps, currencies, crypto…the list goes on and on.

In stocks, we’ll most frequently be tempted to deviate from our long-term investment strategy in market extremes – at the height of the bull markets and the depths of the inevitable bear markets.

Investment Discipline in the Good Times

When the stock market is booming through a bull market and becoming a bubble, it’s usually led by one or two investment ideas.

Tech stocks in the late 90’s are the most recent example of this. They led the market higher than it had ever been. People became convinced the internet age had created a new era for business where the fundamentals of revenue and profit were ignored and replaced by page views and a slick story.

That’s when everyday investors were most tempted to abandon their long-term, diversified investment strategy to concentrate their portfolios in the hot sectors of the internet age: tech stocks, telecom stocks and internet companies.

It proved to be a huge mistake. The NASDAQ (the index that primarily tracks tech stocks) dropped almost 80% from March of 2000 to October of 2002 and didn’t fully recover until April of 2015.

Investment Discipline in the Bad Times

The other extreme is bear markets. When market conditions face meaningful downturns, we’re all tempted to “get out until things look better”. But by the time “things look better”, the stock market is, historically, well into its recovery. 

Historically, the stock market reaches its low point in a bear market and begins its recovery, on average, 107 days before the economic recession ends. But it gets even worse than that because we don’t officially know when a recession ends until months later.

In the Great Recession of 2008-2009, the market bottomed out in March 2009 while the recession continued on for another 3 months, well into June. By the end of June, the S&P 500 had recovered more than 36% since its low point back in March. However, we didn’t get official recognition that the recession had come to an end until September 21st.  By that time, the S&P 500 was up 57% from its low point.

So, waiting until “things look better” cost investors something like 57% returns.

It’s the discipline of sticking with the plan, both when it seems to be working and when it doesn’t, that will get us to our goals.

Discipline in Rebalancing

Rebalancing means resetting your portfolio back to its original target mix. 

Imagine a portfolio of two investments – one that you want to be 40% of your portfolio and the other you want to be 60%. Over time, they will have different returns (if they don’t, they’re invested in essentially the same thing and one of them is probably redundant).

Different returns will make them drift from the targets you’ve set for them.  The first fund might become 45% of your portfolio while the other drops to 55%. Rebalancing brings them back to the original 40% and 60% targets.

But notice what that means – you’re selling some of the investment that has done well and buying more of the investment that has struggled. That’s where rebalancing becomes a discipline. Seeing your investments lag behind or even drop is hard enough. Deciding to buy more of those investments tests the resolve of even the most disciplined investors.

As long as you’re investing in a diversified way, you can count on the cyclicality of the stock market. The phrase “every dog has its day” is one to live by in the global investment markets. And because everything in markets is cyclical, we do want to buy more of the laggards and trim some of the stars.

This institutionalizes the age-old formula for investment success: buy low, sell high.  When we rebalance, we buy what is struggling (buy low) and sell some of what is shining (sell high).

It takes discipline to do that.

Stick with Your Plan

So stick with your plan. Stick with your investment strategy. The markets face the uncertainty of pandemics, riots, and political turmoil. No one knows exactly how these issues will sort themselves out, but history is clear.  Abandoning, adjusting, or “pausing” your investment strategy because of these legitimate concerns has always, without exception, been a mistake.

So hang in there!

If you want help setting up an investing plan that will get you through your retirement and beyond, download a free copy of our eBook, “How to Retire with Confidence and Clarity” and be sure to join our Retirement Income Academy course!


Tumwater Wealth Management is a registered investment adviser and may only conduct business in states where it is registered or exempt. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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