Chief Investment Officer
November 21, 2017
Even with the best intentions and a lot of commitment, it’s tough to stick to a healthy eating plan that has you choosing whole foods and lots of veggies over pizza and burgers.
This challenge is made even greater by the many temptations we face on a daily basis. These temptations give our emotions an opportunity to prevail over our discipline to stick to our plan.
How many times at a restaurant have we chosen fries over a side salad in a moment of weakness?
It might not seem like the act of eating healthy and the act of investing wisely are related — at least, not directly. But think about the factors that contribute to a good diet.
You not only need to know what to eat and where to find those foods, but you also need to know the best ways to prepare meals that align with your goals so eating healthy isn’t just a trend. It becomes part of your lifestyle.
You also need processes and systems in place to make sure you hold yourself accountable and stay consistent with your food choices day in and day out. You’ll need to take those consistent actions over a long period of time to see results.
Setting up a plan for your diet also requires that you assess your health now, define the goals of your diet, and map out a plan on how you intend to achieve your goals.
You might notice that the same components of a good nutrition plan that lead to success are also present in a good financial plan. And looking at investing through this analogy lens makes it easier to understand why investors often struggle with making good investment decisions.
The most difficult part of an effective diet is also the most onerous part of being a good investor. It’s extremely challenging to commit to making good decisions day after day, week after week, and month after month.
It can be very painful to do an honest assessment of your current financial status. For many, it is tough to articulate financial goals beyond wanting to help pay for children’s education or retire comfortably.
It’s also not much fun in the moment to choose a side salad over fries. Similarly, no one would describe the decision to remain invested when the stock market is declining as “fun” or “enjoyable.”
But as famed investor George Soros reminds us, “If investing is entertaining and you’re having fun, you’re probably not making any money.”
Correct investing, like a disciplined diet, requires us to make hard choices in the moment. We have to prioritize our future selves over our want for instant gratification.
It’s for this reason that if investors hope to make the right decisions and avoid the mistakes made in a moment of market weakness, they must have a disciplined plan in place first.
There is a recipe for success that applies as much to a strong diet as it does a solid investment plan: Automate your life.
Rather deciding on lunch when it’s 12pm, you’re starving, and every menu online looks terrific, you can pack your lunch the night before and take it with you in the morning. By deciding on lunch and preparing it while still full from dinner, you’re much more likely to choose a smaller, healthier lunch.
Plus, you don’t have to make a difficult choice in the moment because you automated the decision by making and bringing your meal with you.
As this pertains to your financial plan, automate your investments by having a portion of your salary automatically distributed directly into your 401(k) and savings account. You can also establish a rules-based plan to rebalance your investments periodically so you don’t have to make the difficult decision to sell winners and buy losers in the moment when emotions run high.
These steps provide two monumental benefits to investors: They reduce the number of good decisions individuals must make to be successful, and eliminate the need to make decisions in the most emotional, irrational moments.
As we’ve seen, the same principles that guide how to maintain a healthy diet apply to maintaining a healthy investment approach, too. Even some of the same simple tips and tricks you can use to increase the likelihood of success with your diet can be used to improve your financial plan.
Take “cheat days” as an example of one of those tricks that can help you stick to a specific, strict diet over time. Many good diets allow a cheat day each week.
The premise of a cheat day is that by having the ability to give in to your cravings every once in a while, it will help keep you on the path to long-term success.
Disciplined investors should also be allowed a “cheat day” for their investment portfolio.
It’s not easy to establish a disciplined routine of saving and investing in a well-diversified manner through up markets and down markets. After all, it entails much of the same excitement as watching paint dry.
Like craving chocolate, many investors enjoy the opportunity to pick stocks or invest in a certain market sector on a hunch. If you consistently make positive investment decisions towards your long-term financial goals, consider carving out a small allocation of your portfolio for more liberal investing.
If having a small amount of investing “fun money” satisfies your cravings, gives you something to chat (or brag) about with friends, and allows you to stay on task with your investment plan for the large majority of your portfolio, then it’s a worthy consideration.