How to stay disciplined when investing

How to stay disciplined when investing

Global markets have good years and bad years, but over the long term it pays handsomely to stay invested. Market returns are, in fact, fairly generous. The problem is that investors very rarely actually receive the market return, and understanding why is the key to the fifth step in the Six Steps to Successful Investing series.

In this video, you'll learn the two reasons investors fall short of market returns. The first is the cost of investing. The second is you. Human beings have been conditioned to act on impulse, an instinct that often serves us well elsewhere in life, but when it comes to investing, our emotions do far more harm than good. Markets soar, greed kicks in, and we rush to buy. Markets plummet, fear takes over, and we're overwhelmed by the urge to sell. More often than not, we end up buying and selling at precisely the wrong moments, when in reality we'd be far better off keeping a cool head and, almost invariably, leaving our portfolios exactly as they are.

You'll also learn about the behavioural biases academics have identified in investors. We like to follow the herd. We give far too much weight to recent information. And we consistently overestimate our own investment skill. Recognising these tendencies isn't as easy as it sounds, and you may well need the help of an adviser to do it, but identifying your particular biases and staying aware of them is essential to resisting the temptation to act irrationally.

The takeaway: successful investing means ignoring market volatility and holding your nerve when your instincts are screaming at you to do otherwise. The fifth step to successful investing is to be disciplined.

Chapters / Key points

• Why it pays to stay invested over the long term
• Why market returns are more generous than investors realise
• The two reasons investors rarely receive the market return
• How costs eat into your returns
• Why your own behaviour is the bigger problem
• How greed and fear drive us to buy and sell at the wrong time
• The behavioural biases investors are prone to
• Herd following, recency bias and overconfidence
• Why identifying your own biases matters
• Why discipline is the fifth step to successful investing

Transcript

Six steps to successful investing #5: Be disciplined

Of course there are good years and bad years for global markets, but in the long term it pays to stay invested. Market returns are, in fact, fairly generous.

The problem is, investors very rarely receive the market return, for two reasons. The first is the cost of investing. The second is you.

That's because human beings have been conditioned to act on impulse. It's an instinct that often serves us well. But when it comes to investing, human emotions do far more harm than good.

Markets soar and greed kicks in as we rush to buy. When they plummet, fear takes over and we're overwhelmed by an urge to sell. More often than not, we buy and sell at just the wrong time.

In reality, we'd be much better off keeping a cool head and, almost invariably, leaving our portfolios exactly as they are.

Academics have identified several behavioural biases that investors are prone to. For example, we like to follow the herd; we give far too much weight to recent information; and we tend to overestimate our investment skill.

It's not as easy as it sounds, and you might well need the help of an adviser, but it's important to identify your particular biases and to be aware of them. To ignore the temptation to act irrationally.

The fifth step to successful investing, then, is to be disciplined.