Investing is not easy, not only does it require you to research, plan and strategize, but it also requires you to keep a constant eye on the market while following your investment strategy. While this is easier said than done, there is one thing that often prevents investors from achieving their goals - investing discipline. The perfect investment plan and strategy are nothing without proper execution, and to do so, you will need to have a lot of discipline to achieve your goals.
This article analyzes how important investing discipline is and gives tips for implementing it.
What is investing discipline?
Investing discipline refers to implementing discipline in your investments, whether during your research process, following your strategy, or even how you balance your portfolio. Discipline is a critical component of investing, and it is crucial to achieving your long-term financial goals.
As an investor, even if you do everything right, from the research, to the strategy and portfolio management, you will not succeed unless you are disciplined. Additionally, investing discipline will help you to avoid mistakes along the way and set a solid foundation of principles that will help you during your investing journey.
How to implement discipline in your investments
To effectively implement discipline, you will have to start with the basics, and that includes:
1. Define your investment strategy
2. Determine your risk tolerance
3. Define your preferred asset allocation
4. Establish your investment goals
5. Choose your investment horizon
Once you have defined the basics, it is now time to implement discipline and a set of procedures to review your decisions, actions, and performance. This includes reviewing your portfolio to make sure you are following the strategy and managing your risk accordingly while also making sure your asset allocation is still aligned with your financial goals.
6 Reasons why discipline is necessary for trading and investing
Investing and trading require rational decisions, and it is easy to get influenced by emotions and impulsiveness. This is why in general, it is crucial to be extremely disciplined. Here are some of the other reasons why discipline is a must when investing or trading:
1. Avoid mistakes
Every investor makes mistakes, but when you are undisciplined, it is easier to make irrational decisions and act based on emotion instead of analytical analysis and sound investment principles.
2. Deal with volatility and market crashes
If there is something that certainly messes with investors’ emotions and rationality is volatility and market crashes, and one of the best ways to avoid any mistakes and panic is to stay disciplined. During a market downturn, you need to stick to your investing strategy and principles to stay the course to achieve your financial goals.
3. Manage risk
There are always risks when it comes to investing, but what separates successful investors from the crowd is their ability to manage risk, specifically when assessing the risks of investments relative to your risk tolerance. Having the discipline to always pick investments that match your risk profile, you will avoid taking too much risk for what you can manage and deal with.
4. Focus on the long-term
It is easy to get caught up in the short-term price movements of the stock market, and this can lead investors to make rash and impulsive decisions based on emotion rather than research. A disciplined investment approach allows you to avoid emotional mistakes that could compromise your investment strategy and prevent you from reaching your investment goals.
5. Overconfidence and complacency
While having the confidence to invest is important, investors can be swayed to feel overconfident if they have a few right investments. This can easily lead them to take on additional risks and even change their investment strategy. Discipline prevents investors from becoming overconfident in their abilities, research, and knowledge. The same concept also applies to complacency, which can be related to overconfidence.
6. Prevent overtrading
One of the most common mistakes beginner investors make is overtrading. They buy and sell far too frequently, which not only creates additional investing anxiety, but the fees paid with each trade can also eat their profits. Keeping a disciplined approach to investing prevents you from overtrading, and you are more likely to stick to your strategy.
How to stay disciplined when investing or trading
In theory, we understand the importance of having discipline, but it is not always easy to stay disciplined. Imagine your portfolio collapsing by 20% in a matter of months. It is nearly impossible to stay focused and disciplined during downturns. However, there are a few ways that you can use to remain disciplined no matter what is happening in the markets.
Be brutally honest with yourself
Being brutally honest with yourself is crucial to be successful in the market. Every investor makes mistakes from time to time, and it is nearly impossible to improve your investment ability and knowledge if you are not able to assess and analyze your own decisions, research, and strategy with brutal honesty.
Hold yourself accountable no matter what
We all have difficulty holding ourselves accountable for our mistakes and sub-optimal decisions. Still, it is of the utmost importance to constantly review your decisions and hold yourself accountable if you make any mistakes. It is the only way to improve your investing ability over the long term and ensure that you evolve as an investor.
Create a review system and evaluate yourself
While it may seem difficult to detach yourself completely from your actions, it is important to create a system that allows you to constantly review and analyze your investment process and decisions. Reviewing your actions will allow you to improve and make slight changes while you evolve as an investor.