Investment Discipline – Are you you the weakest link?

The investor’s chief problem – and even his worst enemy – is likely to be himself.

Benjamin Graham “Security Analysis”, 1934

Investing is often likened to a ride on an emotional roller coaster. If you consider the typical behaviour of the vast majority of investors, you can understand why. When an upward trend – either for an individual stock or indeed the market as a whole – starts to emerge, the investor follows the trend but only buys in once he is convinced that it is for real.

Unfortunately, this is usually at the point that all the gains have been had and the trend reverses. Thus, it can be seen how the emotions that drive investors are a powerful force that lead them to buy high and sell low.Roller CoasterThe solution therefore is for the investor to select a portfolio that would allow him to remove his emotions from the investment equation. This can be achieved by the use of a portfolio of globally diversified index funds, tempered with a fixed income component to reduce volatility.

This allows him to stay invested at a risk level with which he feels comfortable and which minimises his urge to move. In that sense, it could be said that the stock market is like a wild bull trying to buck investors off its back. The investor’s objective is to find the bull he can stick with and ride until the buzzer sounds. The buzzer in this analogy represents an investor’s need to withdraw his funds from the market at a time of his choosing.