William Bernstein recently wrote an article for Money magazine where he proposes the idea that your emotional fitness is a huge factor in determining your investment results. Here’s how he explains it:
[Investors] are handing over their stocks, at cheaper prices, to the disciplined investors who began the race in good financial condition. By financial condition, I don’t mean the state of the buyers’ bank account or even their market expertise but rather their emotional fitness to handle market volatility. And most of us aren’t born with that. You have to train.
This is exactly what I said a while back when I wrote that people could increase their tolerance for volatility. Bernstein suggests that it can be done by implementing a system of annual portfolio rebalancing, thereby training yourself to sell high and buy low. I think that’s a great idea.
I would add, however, that I think it can be also be done simply by learning more about market history and its cyclical nature. (Note: I’m not saying to do this instead of portfolio rebalancing, I’m saying to do it in addition to portfolio rebalancing.)
The good news is that unlike an elite athlete, an emotionally fit investor doesn’t have to wake up at 6 a.m. every morning to work out (or tune in to CNBC). In fact, it’s better not to think about investing most of the time. I know no greater investment pro than Vanguard founder John Bogle; he tells me that he peeks at his holdings only once a year. In this race, the edge goes to the disciplined couch potato.
Whether you call it Oblivious Investing, or being a “discliplined couch potato,” it’s a neat concept: Stop worrying about your investments, and they’ll start performing better (because you won’t be ruining their returns).
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