Disciplined investing: five principles to follow
By Jac de Wet, PSG Wealth
Despite our best intentions, many of us focus on the wrong things when it comes to our savings and investments. We tend to focus on the factors we can’t control, typically headline-grabbing things like investment returns and the markets. We barely ever focus on the factors and variables that can be controlled, like risk, time in the market, behaviour and cost. Because of this, investors often find themselves chasing short-term performance; reacting emotionally to market conditions, macroeconomic and political events; and responding by switching in and out of portfolios or cash at the wrong time.
Having a long-term plan in place can be comforting, but if you do not follow the plan, it is useless. Every day we see good intentions fall by the wayside because discipline is lacking. If you focus on the wrong things and get distracted by market noise, you will not reap the rewards of disciplined saving and investing – despite your best intentions.
Five core principles for disciplined investing:
- Start with a long-term investment philosophy.
- Base your asset allocation on your investment goals and needs.
- Don’t deviate from your asset allocation as markets move.
- Don’t chase last year’s winners.
- Don’t sit on the sidelines waiting for market direction.
Start with a long-term investment philosophy
What do you believe drives the performance of various asset classes over time, and how can you make this work in your favour when it comes to investing? Do you have the research to validate your beliefs, and has your investment philosophy been proven despite market cycles and short-term upsets?
Make sure your investment philosophy is compatible with that of your adviser, the company you invest with and the manager of your funds.
Base your asset allocation on your investment goals and needs
To use a sports metaphor: if your investment philosophy is the rules of the game, asset allocation is the game plan that helps you achieve your goals. Asset allocation refers to how the investment portfolio is diversified across asset classes (for example cash, bonds, property and equities) and getting this balance right should help you achieve your goals. It provides you with a guideline to follow through all market conditions, whether good, bad or flat.
Don’t deviate from your asset allocation as markets move
Markets move. Maintaining your asset allocation in line with your goals and needs helps you avoid the temptation to change your plan based on recent events or differing growth rates of asset classes over time. Review your portfolio at least once a year to ensure that the returns you are achieving are aligned with your original plan. By rebalancing your portfolio, asset allocation can be controlled and maintained. Additional contributions and withdrawals also provide an opportunity to rebalance.
Don’t chase last year’s winners
Long term means just that. Making changes to your portfolio based only on short-term developments is likely to be counterproductive. You should only make changes to your portfolio where it is no longer clear that it can deliver on your long-term goals and needs. Investment portfolios should be built for the long haul, and chasing last year’s winners is sure to disappoint. Changes should be made with good reason – short-term ups and downs are not good reason.
Don’t sit on the sidelines waiting for market direction
It is not always easy to invest when your portfolio isn’t delivering as expected or when the markets are in turmoil. Investment discipline is about consistently forming and maintaining good investment and savings habits. It can be difficult to commit when the market is in upheaval, but times like these often present the best opportunities to buy as you enter the market at a lower point.
The key to discipline… is discipline
The key to maintaining savings discipline is sticking to the rules. This may sound inflexible, but discipline is all about avoiding distractions along the way. The catch is that while it is easy to read about savings discipline, maintaining it is hard. For this reason, it is good to have a coach – in the form of a qualified financial planner or adviser – that can remind you of the benefits of discipline.