Investing is a long-term endeavour.
Successful family stewards often spend decades pursuing their financial goals.
But being an investor can be complicated, challenging, frustrating, and sometimes frightening.
Last week, I summarised our investment philosophy in one phrase.
It's simple but not always easy to stick with - designed to help our clients stay the course when things get rough.
This simple idea highlights an important question.
How can investors maintain discipline through bull markets, bear markets, sideways markets, political strife, economic instability, or whatever crisis threatens their pathway towards their investment goals?
Throughout their lives, investors encounter many decisions that are influenced by events both in, and out of, their control. Without an unwavering philosophy to guide them, stress is inevitable.
This can lead to highly detrimental choices and consequences that harm their long-term financial health.
Typically, when investors don’t get the results they want, many may blame things outside their control (say, the government, central banks, markets, the economy, me), rather than evaluating and reflecting on their own responses to events and taking responsibility for their decisions.
One key trait that differentiates highly successful individuals from others, is their ability to influence outcomes by managing their responses to events, rather than trying to control the events themselves, according to some experts.
In other words, E + R = O (Event + Response = Outcome).
Could an outcome—either positive or negative—be the result of how you respond to an event, and not just the result of the event itself?
This would mean events, while important, don't exclusively influence outcomes (if this were the case, everyone would have the same outcome regardless of their response).
Now, let's consider this idea within the realm of your investments.
Event: A major shock, such as the failure of a bank, causes a market to fall.
Response: Influenced by negative media coverage and the resulting uncertainty, you may be tempted to sell some or all of your investment.
Outcome: Without a focus on the long-term and giving in to the temptation of short-term news, you may miss out on the subsequent market recovery and experience anxiety about when or if to re-enter the market, resulting in less than optimal investment returns.
A domino effect.
Now consider this.
Event: A major shock, such as the failure of a bank, causes a market to fall.
Response: Based on your understanding of the long-term nature of returns and the certain ups and downs around news, you stick to your plan, control your emotions and tune out the noise.
Outcome: The market recovers, you changed nothing, and you reap the substantial rewards that other retail investors missed out on.
Same event, different outcome based on response.
This example also reveals why having an investment philosophy is so important.
By understanding how markets work and maintaining a long-term perspective on past events, investors can focus on ensuring that their responses to events are consistent with their long-term plan (often a 40 or 50-year plan and not a one or two-year one).
Our investment philosophy is built on solid principles backed by decades of empirical academic evidence.
Examples of such principles might be: trusting the markets, thinking far ahead (at least 5 years), diversifying and controlling the controllable.
These principles can help us approach market events with greater confidence, even in the face of globally significant or paradigm shifts. It's not uncommon to hear claims that "it's different this time," but by adhering to these principles, we can maintain a steady course and avoid making hasty decisions based on fear or uncertainty.
Simple but not easy.
Adhering to these principles can also help investors resist the temptation of investment fads or worse, scams (even the most self-aware find it hard to manage their own responses to events).
Investing will always be both alluring and scary, but a view of how to approach investing combined with the guidance of a sage fiduciary (a professional duty-bound to work in your best interests) can help you stay the course through challenging times.
So, if you're feeling a sense of drift in terms of your journey, or recognise some of the above scenarios in yourself, we'd be happy to offer a safe pair of hands, starting with an informal chat about where you're at right now.
Sometimes, this is all you need to help increase the probability of having a successful financial outcome.
