Consistency Beats Volatility

When it comes to investing, the boring approach is much more likely to give you the exciting returns.

For most investors, the emphasis placed on maintaining discipline by professional investment advisers is interpreted to mean: stay with the strategy even when times are bad. In fact, recent history shows it was exceptional investment returns, such as those experienced during the tech stock bubble of the 1990s, rather than adverse market conditions that proved the biggest challenge to staying with the programme.

It is often said that the two conflicting emotions that rule investors are fear and greed. But we must add to that the basic human instinct for “belonging” and “acceptance”. In other words, if your peer group appears to be making a fortune from the latest hot stocks, you not only feel that you are missing out (greed) but also that you are not one of the in-crowd (acceptance).

The loss of “bragging rights” in the golf club bar has thus tempted many otherwise rational investors to abandon sensible, long-term diversified strategies in favour of short-term gratification which they later repent at leisure. Or perhaps not at leisure – as their retirement plans are postponed because their investments have failed to perform.

Any investors who find themselves challenged in this way should take comfort from the mathematics underpinning the concept that consistency beats volatility and that a globally diversified portfolio of “boring” index funds will beat the “exciting” hot stocks over the long-term.Screen Shot 2013-07-09 at 18.22.18