It is often said that the key to success in any field is discipline. This is certainly true when it comes to investing. If you are not disciplined, you will be more likely to make poor investment decisions which can cost you dearly in terms of lost profits, this is why investment discipline is absolutely crucial to be successful when investing.
In this blog post, we will discuss the importance of investment discipline and how you can implement it into your own investing strategy.
What is investment discipline?
Investing in discipline can mean different things to different people. Thus, it's best to think of it as a mindset or approach that you bring to your investing. It is being systematic and unemotional in your decision-making and having the patience to stick to your chosen strategy even when markets are volatile.
Discipline can be described as a set of rules or behaviors that one follows to achieve a goal. When it comes to investing, your goal is to make money. To make money, you need to be disciplined in your approach.
This sounds simple but to have sound investing discipline can be quite difficult. Psychological influences can easily deter you from making rational investment decisions. To understand investment discipline, it can be helpful to take a look at an example of what undisciplined investing looks like.
Here's an example story of Mr. Impulsive. Mr. Impulsive was an undisciplined investor who always acted on his emotions. When the stock market went up, he got excited and bought stocks without doing any research.
When the market went down, he got scared and sold his stocks. He always ended up buying high and selling low. Over time, Mr. Impulsive lost a lot of money because he didn't have the discipline to stick to an investing strategy.
What are the benefits of being disciplined when investing?
Stress and anxiety are two major emotions that can lead to poor investment decisions. When you are stressed or anxious, it is difficult to think clearly and make rational decisions. Poor investment decisions can also lead to stress, anger, and a decline in self-confidence even in other areas of your life.
Undisciplined investing creates a negative feedback loop where emotions lead to bad decisions which then lead to more negative emotions. Therefore, if you are disciplined in your approach to investing, you will be more likely to make sound investment decisions.
This can lead to increased profits and peace of mind. A disciplined investor can stick to their chosen strategy even when markets are volatile. They are also less likely to panic and sell their stocks when the market crashes.
The benefits of learning discipline can be utilized in other areas of your life. By becoming disciplined and learning delayed gratification, you can let your wealth compound. Similarly, if you take that lesson and apply it to fitness, for example, you can let your discipline in the gym compound create a healthier and fitter you.
Another benefit of being disciplined in the markets is that you can maintain control over yourself and your decisions. Undisciplined investors can often be the psychological slave to market conditions, news reports, other market participants, and their emotions.
A disciplined investor is in control of their decisions and is not swayed by outside influences. This mastery is one of the most important benefits because it allows you to make decisions based on your own strategy, not someone else's.
Discipline helps you to stick to your plan. For example, if DCA (dollars cost averaging) is your strategy then you need to have the discipline to continue buying even when the markets are down.
Similarly, if you're investing for the long term, you need to be patient and have the discipline to hold onto your investments even when they are underperforming in the short term.
The final benefit we will discuss is that being disciplined can make you a better investor. If you aren't disciplined and let greed get the best of you, you might end up buying stocks that are overvalued and taking on too much risk.
When you are disciplined in your approach, you will do the research necessary to find stocks that are undervalued and have the potential to generate strong returns. Overall, the benefits are quite clear. More money in your account, better stress management, and a happier experience in the markets.
Investing can make you money, but it can also be an experience that helps manifest self-actualization. This means that the benefit of discipline in the markets can transform you into a better person.
Being disciplined and learning how to write a concise and intelligent design is also important. Whether that means reading a book a day like Warren Buffet.
The point is to be continuously learning and growing as an investor so that you can make more money. Being disciplined in your investing studies is difficult. But the challenge is also what makes it so rewarding.
As you can see, the investment discipline is essential if you want to be a successful investor. It can be difficult to maintain but it is worth it in the long run. Now, you might be thinking, "Okay, maybe I could be a little more disciplined in my investing approach. But how do I actually do that?"
How to implement investment discipline
There's no denying the benefits of disciplined investing. However, most people fail to implement investing discipline because they don't know how. So, let's discuss a few practical investment discipline tips that you can use to start becoming more disciplined in your approach to investing:
1. Know yourself
By taking the time to understand your investment personality, you can make sure that your investment strategy is aligned with who you are. For example, if you are a risk-averse investor, you should avoid investing in high-risk stocks.
This is because when market volatility arises, you will be more likely to sell your stocks out of fear, which will lock in losses.
2. Educate yourself on investing
The more you know about investing, the easier it will be to stick to your chosen strategy. So, make sure to educate yourself on the basics of investing and the different strategies that you can use.
Once you know the area of investing that you are most passionate about, it can be easier to stay disciplined.
3. Have a plan
Having a written investment plan is one of the best ways to maintain discipline in your approach. By having a plan, you will know exactly what your investment goals are and how you plan on achieving them.
This will make it easier to stay focused and avoid making impulsive decisions.
By writing down the top three investing-related tasks that will be the most productive and scratching them off as you complete them, you can help increase your sense of accomplishment and drive to achieve more.
This is because you can see exactly what you've done and what still needs to be accomplished. An example of a checklist could be something like this:
1. Research a stock that you've been thinking about investing in
2. Read a chapter of an investing book
3. Readjust your portfolio because of a change in your personal circumstances
5. Set limits
One of the most common mistakes that investors make is not setting limits. This is because they believe that they can always make more money. However, this isn't true. There will always be a point where you need to take profits or cut losses.
By setting limits, you can help to avoid making emotionally driven decisions. You can also limit the allocation of your portfolio. For example, if you are risk-averse, you can limit your portfolio to only 10% in a specific sector, or you may even consider some safer investment options.
This will help to reduce the volatility of your portfolio and make it easier for you to stick to your investment strategy.
6. Set realistic expectations
One of the main reasons why investors fail to stick to their investment strategy is because they have unrealistic expectations. This is often because they compare their portfolio performance to that of the stock market.
However, it's important to remember that the stock market is a long-term game. So, you shouldn't expect your portfolio to outperform the market every single year. Without realistic expectations, discipline can be destroyed by ambitions.
Taking risky bets just to try and outperform the market is a recipe for disaster.
7. Set up a support system
Having people hold you accountable is a great way to maintain discipline. This could be in the form of a financial advisor or even just a friend or family member who is willing to offer support and advice.
Make sure they aren't influential or persuasive market participants by being rather strict with your goals and limitations. This is because mimetic desire, or following the crowd, is one of the main reasons why investors make poor decisions.
But, having people that aren't inclined to sway you towards a decision but rather ensure that you are making your own can be very helpful.
By following these investment discipline tips, you can help to make sure that you maintain discipline in your approach to investing. Discipline makes you into the master of your own decisions rather than a puppet to your emotions or the whims of the market.
So, make sure to keep these tips in mind the next time you are tempted to make an impulsive decision. What other tips would you add to this list? Let us know in the comments below.