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What is Discipline Based Investing?

I am a strong proponent of what I liked to call “Discipline Based Investing”. Disciple Based Investing is any asset allocation that is implemented using a systematic, evidence based & behaviorally robust strategy.

To me, investing is a lot like losing weight. Everyone knows the general way to get healthier – eat better and exercise. But losing weight is easy in theory and difficult in practice mainly because it’s so hard to stay disciplined to a strict diet and exercise routine. In fact, a growing number of diet studies have found that it doesn’t even matter which diet you use so long as you remain disciplined to ANY of them (see Johnston 2014 & Gardner 2018). Investing is similar. There are numerous investment strategies that apply approaches that are supported by academic work and evidence. But none of them will work if you can’t stick with them.

So, what specifically, is Discipline Based Investing?

Discipline Based Investing follows these basic principles:

  1. Start with a planning based foundation to establish clear financial goals, time horizons and realistic expectations.
  2. Use evidence based portfolio theory including diversification, cost matters hypothesis, etc.

Once that’s established a Discipline Based Investing process includes:

  • Systematic non-discretionary processes.
  • Risk profile consistent allocations.
  • Diversification across uncorrelated asset classes to reduce volatility and behavioral biases.
  • Implement a behaviorally robust asset liability matching strategy.
  • Patience and discipline to let the plan work!

Examples of DBI strategies include target date mutual funds, Harry Browne’s Permanent Portfolio, Vanguard’s Life Strategy funds, low cost risk parity portfolios and any low cost multi-asset rebalancing fund such as a 60/40 stock/bond fund. The consistent feature of a DBI strategy is that it establishes a clear set of goals and processes that are systematically maintained to reduce behavioral biases over time.

DBI is about establishing objective, evidence based truths and then using those understandings to build sound and appropriate portfolios as opposed to treating the secondary markets and our savings like it’s a place to “get rich quick”. DBI is based on decades of behavioral finance and operational understandings of the monetary and financial system.