A 54-year-old couple finally gets their last child out of college, has their mortgage paid off and begins the final run to retirement, about a dozen years down the road. They have diligently set up a beautifully diversified investment account of equity and bond funds and they set up automatic payments into the account, harnessing the powerful force of dollar cost averaging. They invest in month one and… the markets go down. They hardly notice. Their checking account is debited month two and…the market goes down again.
This goes on for a few more months, with the media blasting about a recession, or inflation, or the overleveraged student loan situation, or whatever variable disaster it chooses to isolate. And suddenly our 54-year-old couple are starting to wonder aloud if they shouldn’t hold off on further contributions until “things turn around.” Economic analysis or market prognostications are not going to do this couple any good at this point. They are about to lose faith and patience in capital markets (see our last two months where I wrote about Faith and Patience) but there is something else they need just now… in addition to faith and patience.
They need discipline, the conscious decision to keep doing what we know is the right thing.
This little story illustrates one of the most inappropriate and deeply ingrained tendencies we find all too often in investors who are still accumulating wealth; an aversion to falling prices. To me, this is the exact opposite of common sense.
To the regular buyer of equities, lower prices are heaven-sent. Falling prices lower the average cost – letting the investor buy more and more shares with the same regular contributions – and thereby raising the prospects of an excellent lifetime return.
The accumulator should really be saying, “Not only should I keep investing regularly, I should hope things don’t turn around anytime soon, because I want to accumulate as many bargain-priced shares as I can before the sale ends!”
The Disciplined Investors’ Mantra becomes:
“I don’t care what’s working now. I care about what’s always worked… and I’m just going to keep doing what’s always worked.”
The bottom line is, when discipline fails, plans fail and lives change. The disciplined investor continues to act, and doesn’t react, regardless of the noise around her, and because of this her plan succeeds and she reaches her goals.
We could hardly overstate the importance of our role in keeping our clients disciplined. It’s your plan, but we’re the planners, so we have a shared motivation to make sure the plan doesn’t fail.