I think 2022 is likely to be the best investment discipline. Not clear during the coronavirus pandemic, with inflation expected to rise and the Federal Reserve poised to raise interest rates, anything can happen – and probably will.
Furthermore, the things that feel most certain are not as clear as they seem – so investors need to be wary of taking drastic action that, later, they wish they could undo.
To see why discipline is such an important investment quality, consider the history of interest rate decisions by the Fed. The central bank appears to be forecasting at least three 0.25% hikes in interest rates this year, possibly starting in March. Most investors are treating that forecast as a foregone conclusion.
It is not. Go back to the 1990s and you’ll see that central banks sometimes raised or lowered rates in a way that not only surprised the markets, but contradicted the Fed’s own expectations. Investors looking to overhaul their portfolios based on what the Fed is likely to do could be stranded if it does something else entirely.
Or let’s say the shares look like they will be due for a shock. This is also not a sure thing.
According to the S&P Dow Jones Index, the S&P 500 returned 28.7% last year counting reinvestment dividends, the seventh-largest gain in the past half-century. This is followed by total returns of 18.4% in 2020 and 31.5% in 2019. Over the past three calendar years, US stocks have doubled.
So it’s no surprise that Wall Street strategists almost unanimously expect weak returns in 2022—or that the year has already begun a hesitation, as fears of rising interest rates hit stock prices this week. has declined by 1%.
You are wrong if you think that after three consecutive years there can never be a big profit. In 1995, the S&P 500 gave a 37.5% return. In 1996, the shares rose 23.1%. He gained 33.3% in 1997, 28.7% in 1998 and still 21.1% in 1999.
The market finally crashed in 2000. Over the next two and a half years, the S&P 500 fell nearly 50% and the Nasdaq-100 index of technology stocks fell more than 80%.
But this calculation came long after many market commentators—including me—had expected. As money manager Martin Zweig (no relation), who died in 2013, liked to say: “The markets will always do what they need to do to screw up as many people as possible.”
All of this explains why discipline is the greatest investment quality. When you change your long-term course based on what feels like a short-term sure thing, you’re likely to be caught by surprise — and racked with regret.
Investors are always on the lookout for good ideas when they need good habits. Only processes that you repeat and follow till they become automated will enable you to invest consistently over the long run.
“Your behavior is much more controlled than it is in your environment,” says Wendy Wood, professor of psychology and business at the University of Southern California and author of the book “Good Habits, Bad Habits: The Science.” Stay tuned to bring about a positive change.”
To curb bad habits, Prof. Wood’s research suggests, you need to add “frictions” or restrictions that turn easy, automatic behaviors into tasks that require effort.
If you find yourself constantly checking your portfolio on a brokerage app like Robinhood, set your phone to grayscale, which will neutralize the visual stimuli that can lead you into overtrading. If that doesn’t work, remove the app from your phone’s home screen—or delete it so you can only use it while running on your computer.
If you must watch CNBC or other financial television, watch it with the sound off.
Pro. “One of the really cool things about adding friction to behavior is that it encourages you to do something else,” says Wood. Making a bad habit more difficult enables you to replace it with a good one.
After decades of investing, Rashmi Doshi, a 69-year-old retired telecom executive in the San Diego area, regularly monitors her portfolio only four times a year. Every time he prepares his estimated quarterly income taxes, Mr. Doshi uploads the values of his investment account into a spreadsheet. There, he checks their returns for the last three months and the last one, three and five years.
If a holding has gone beyond the target set by Mr. Doshi by at least 5%, he buys or sells it as needed to bring it back into balance. More often than not, he does nothing. “Most gyrations are just noise,” he says, “and as a radio-frequency engineer, I am used to dealing with noise.”
The key to discipline? Think of investing not as a series of decisions, but as a habit.
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