One of the biggest reasons people invest is because they want to have enough money to live on later in life. They understand that even modest inflation deteriorates the value of their current dollars over the course of time. In order to at least keep up with inflation, money gets put into an investment portfolio.
Sometimes the goal of beating inflation and making sure there’s enough money available to retire gets mixed up with what I deem delusions of grandeur. Some may think that the stock market is a good place to “get rich quick”, others fantasize about beating the market every year or avoiding the next crash. I think they’re losing sight of the only accomplishment that actually matters: whether or not they can live comfortably in retirement.
Remaining focused on the financial goals that actually matter is easier said than done. It takes serious discipline. At times, it will be extremely uncomfortable. However, I believe that for the average retirement investor it pays to be uncomfortable while they can afford it. By that I mean, choosing to be occasionally uncomfortable with investments, rather than permanently uncomfortable later in life because there’s not enough money.
Being uncomfortable is something everybody deals with in life. In fact, I’d go so far as to say that life is about how you deal with being uncomfortable. It’s how we choose to react (or not react) to uncomfortable things that shapes us.
Sometimes our brain tricks us into reacting to things we don’t need to. As humans, we’ve been ingrained with a “fight or flight” response to perceived danger. This is helpful when we’re actually under physical duress, but less so when we aren’t. We’re also extraordinarily present-biased. This combination makes us poor at dealing with uncomfortable moments in the present, especially when they have no clear pay-off in the immediate future.
Unfortunately, this is almost precisely what long term investing is like. Dealing with short term market volatility for the good of your retired self is not an easy task, but there are no market gains to be had without some degree of discomfort.
Seeing an investment decline in value is often enough to kick our “fight or flight” instinct into action. This is usually when big mistakes happen. In order to be successful long term investors, we must learn how to tame our “fight or flight” instinct because it’s detrimental to our success.
NY Magazine ran an excellent post a few weeks ago titled, “How Exercise Shapes You, Far Beyond the Gym”. I couldn’t help but think of investors when I read it. The author talks about learning to be comfortable with being uncomfortable, and related it to physical activity. Exercise is a great example of humans working against a busted form of our “fight or flight” instinct. It might be uncomfortable to run five miles, but does that mean we must listen to our brain’s desires to stop mid-run? Not if our goal is to build cardiovascular endurance. Think about it, most of the greatest physical feats the human race has ever seen were accomplished by athletes who accepted being temporarily uncomfortable in order to do something extraordinary. I believe the saying goes, “No pain, no gain”, not “No pain, great gains”. This applies to fitness as much as it does to investment results. There’s no market upside without the downside, just like there isn’t a magic pill that makes you fit.
If you have any kind of exercise regimen, you already have the predisposition to become a successful investor. Just as you ignore the urge to cut your daily run short or hit the snooze before your morning workout, you can ignore the urge to rip up your investment portfolio due to short term market movements.
Successful long term investing is about being disciplined enough to deal with uncomfortable moments along the way. This isn’t easy, but one way you can make it less difficult is by automating good behavior you’d like to perform in the future. Eliminating the need to make decisions during uncomfortable times will go a long way towards improving future behavior.