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The Best Investment Strategy: DISCIPLINE

I was reading this article in the NY Times about a wide ranging diet study. They performed a meticulously controlled test to study what type of diet works best. Their conclusion:

“The bottom line is that the best diet for you is still the one you will stick to. No one knows better than you what that diet might be. You’ll most likely have to figure it out for yourself.”

One of my favorite things about investing is its similarities with dieting and health. Mainly, investing is really simple in theory (diversify, reduce costs, reduce taxes, etc) and really difficult in reality (because our emotions are constantly being tested).

I constantly struggle to stay healthy. I am finishing up a 90 day diet after putting on about 30 pound in Q4 and I can tell you that the only thing that works for me is starvation. I have been eating one big meal a day with small snacks along the way. I weighed 205 pounds on New Years night and I am about 175 today. But this isn’t really about a particular diet. I didn’t lose the weight by eating particular stuff and following some diet fad. In fact, a lot of those meals were terrible. But even though many of the meals were terrible I was disciplined in sticking to that one meal. My weight loss was all about one thing – a simple plan that I stayed disciplined with.¹

The same exact thing is true of investing. The best strategy you’ll ever implement is the one you’ll stick with. Unfortunately, much like dieting, people over-complicate things and are constantly switching their strategy trying to find that perfect (ever elusive) approach that will optimize every aspect of their portfolio. They never find it (because, like the perfect diet, it doesn’t exist) and so they end up wasting time, fees and taxes all along the way to poor performance.

The best investors are disciplined when others are undisciplined and appear undisciplined when others are in search of discipline.

Morningstar has shown that the average investor fails to earn the market return because they are constantly switching their strategies.² This is even true in a fund like the Vanguard 500 Index where you would expect better discpline, but in fact see a massive 3.76% difference in the 10 year Investor Return and Total Return.³

What explains this poor performance? DISCIPLINE. That’s all this really is. People ditch stocks when they fall and buy them when they rise. You could have even invested in a high fee US based active mutual fund and as long as you stayed disciplined to that strategy you did better than the average indexer over the last 10 years. In other words, even a sub-optimal strategy that you actually stick with ends up generating better returns.

Good investing is just like successful dieting. You don’t need to discover some holy grail of dieting. You just need a plan that will instill discipline in you so that you stick with it. That’s the only diet that works and it’s the only investment strategy that works.

Now, please excuse me while I spend the next 9 months putting that 30 pounds back on.

¹ – Simple works because it helps better instill discipline. This is the key factor that makes indexing such a good strategy. When implemented in a systematic manner indexing helps instill discipline across a diversified, low fee and tax efficient strategy.  

² – “Mind the Gap: Global Investor Returns Show the Costs of Bad Timing Around the World”, Morningstar, 5/30/17

³ – Vanguard 500 Investor Returns vs Total Returns