Stay the Course!
Our behaviour is dramatically shaped by bombardment of financial news and opinions, particularly at the beginning of each year (so called expert forecasts) and during times of financial tumult.
Inherently, we may know that we should be greedy when others are fearful and fearful when others are greedy, but we are also receiving very powerful messages and cues in the form of commentators and "experts" telling us that the "end is nigh" and when we look at our quarterly portfolio statements.
If we don't have decisional constraints in place, it is easy to be lured into making wrong decisions!
Our capacities for intense focus and restraint are limited and today's moderation sows the seeds for tomorrows excesses (ask the person on a very restricted diet, when they binge-eat at the first possible opportunity!) - that's why we need to create habits and processes.
As in all areas of life: Motivation is what gets you started, habit is what keeps you going!
For investing, that is even more ob obvious:
It is extremely difficult and draining to be conservative in the face of a bullish market or to snatch up bargains during a panic.
So difficult, that anybody would fail if they had to make those decisions every day (think of your struggles in deciding what to wear very day!) that, unless an investor has a process and a discipline to follow the process with exactness, he/she is prone to fail.
An analysis by various authors (Gary, Vogel and Foulke, DIY Financial Advisor, p.23) found that investment models equal or beat expert decision-making a startling 94.12% of the time, meaning that human discretionary decision making was superior only 5.88% of the time.
All the research corroborates the fact:
If you are using human judgement instead of a process to make investment decisions, you are doing extra work with diminished results!
The solution is in designing and abiding by an investment process that is as much as possible resistant to behavioural decision making errors.
(Consider this: With all the knowledge that you have, you should NEVER lose your temper with your kids, skip exercise or overeat, if emotions had no overriding effect. Education is no substitute for emotional guardrails).
When looking at financial markets and the stock market in particular, we generally have to deal with three types of risk: systemic, unsystematic and behavioural.
Systemic risk refers to market risk, ie losing money from broad market moves. This risk cannot be diversified away and examples include natural disaster, acts of terrorism, etc.
Unsystematic risk refers to the individual business risk and reflects the risks of an individual business going down in value. This risk can and should be hedged against through diversification, ie owning more than one company from more than one business sector.
Behavioural risk refers to the fact that YOUR own actions increase the probability of 'permanent loss of capital'.