For most of us, the key to playing any sport well is to simplify the game, play within our abilities, and keep errors to a minimum. The same is true for long-term investing.
Golf is an apt comparison as relayed by Charley Ellis with the help of Tommy Armour:
Armour summarizes his years as a competitor, teacher, and student of the Great Game with a simple fact that undoubtedly will improve your scoring. “It is not solely the capacity to make great shots that makes champions, but the essential quality of making very few bad shots.” When Bob Hagin popularized “torpedo” stocks, he was making the same point. Imagine how investment performance could be improved by deleting any fund’s three or four worst stocks.
Like all great teachers, Armour repeats himself: “The way to win is by making fewer bad shots.”…
Armour goes on to explain his meaning with somewhat different words: “Play the shot you’ve got the greatest chance of playing well, and play the shot that makes the next shot easy.” Armour might change this advice a bit for investors to: Make the investment decision today that makes holding on for the long term easy.
Of course, improving performance goes beyond just removing a handful of bad performing stocks. Reducing emotional and biased decisions helps too. Maybe more so when it comes to holding on the long term.
History has shown that investing errors are multitude but the worst of it concentrates around moments of market extremes or spikes in volatility that surprise us. Decisions during market corrections, much like today, or deeper drawdowns are more about appeasing nervousness, anxiety, or fear than what Ellis advises.
It’s those emotional reactions absent of thought that lead us to:
- Over allocate to stocks after a significant rise and under allocate after a deep decline.
- Sell and likely lock in losses … with the idea to buy back after things have calmed down and, in turn, miss the inevitable market bounce and run up that follows.
- Let economic, political, or geopolitical news, bluster, or beliefs seep into portfolio allocation.
- Look to market oracles for answers and certainty. They don’t exist.
- Ditch a long-term strategy at the moment it’s needed most.
All of these decisions do the opposite of “makes holding on for the long term easy.”
The good news is these errors are avoidable. The solution is to have a plan of action in place for moments like these. A plan designed so your portfolio survives and takes advantage of market corrections gives you something to lean on when emotions are high.
The plan should be simple and easy to follow. It should be designed around the ultimate purpose for your money be it retirement, college savings, or the like, giving you an added reminder why you’re following it. Finally, it should be designed with your comfort level in mind to make it easier for you to stick with it.
It’s okay to be nervous. It’s okay to be anxious. It’s okay to have emotions around the market. Acting rashly on it is not. The decision to build a plan for the inevitable drawdowns makes holding on for the long term easy.
Source: Tommy Armour on Investing
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