“You have bigger cojones than me.”
That’s what one of my buddies told me this past August as the market was sliding. He and I were discussing investing, and I mentioned that I had put some money to work.
“I don’t know when this sell-off is going to end. I’m too scared to buy right now,” he added.
I had no idea when the market would stop falling either. But there’s one factor that has been more responsible for my investing success than anything else, and I wasn’t about to abandon it just because of a sell-off.
Discipline.
The key to investing success is not necessarily picking the best stocks – it’s how long you stay invested.
Over the past 20 years, seven of the 10 best days in the market came within 15 days of one of the 10 worst days. Missing out on those 10 best days would’ve cost investors an astonishing 4.2 percentage points per year of performance.
If you had invested $100,000 in 2004 and let it compound for 20 years at 10.2% per year (the average annual return of the market over that span), it would’ve turned into $697,640. However, if you had missed the 10 best days, you would’ve earned just 6% annually and made only $320,713. That’s a heck of a difference.
I try to stay disciplined in most areas of my life, but I’m not perfect. On occasion, I’ll eat so much that my stomach hurts, or I’ll go down some internet rabbit hole while I’m supposed to be writing (why can’t Hall and Oates just get along?).
When it comes to investing, I use three key strategies to stay on the straight and narrow.
1. Keep investing.
Not only do I stay invested for the long term – I continue to invest.
I have a method for making sure I invest no matter what the market is doing: I buy stocks on my and my immediate family’s birthdays, which are pretty evenly spread out throughout the year. This way, I’m not trying to time the market, and I know that I will be adding to my holdings several times a year, guaranteed.
Admittedly, there will be times when I am buying high, but there will also be times when I am buying very low. (If the market sells off or crashes right before my birthday, happy birthday to me!)
I invest at other times too, but regardless of what is happening in the market, right before we start unwrapping presents, I hit the buy button.
2. Don’t risk short-term money.
I don’t worry about the market affecting my ability to pay my bills – even the big ones, like my kids’ college tuition – because that money isn’t exposed to the whims of the market.
At various points in my life – whether it was when we were getting ready to buy our first house or when we were sending the kids to college – I took funds out of the market so that they would be there when I needed them. Generally speaking, I recommend that any funds that you’ll need in the next three years should not be invested in the stock market.
3. Don’t put too much money in one investment.
If you have a lot of money in an investment and it turns against you, it can leave a big hole in your portfolio.
That’s why The Oxford Club recommends that you cap your investments at 4% of your total investment portfolio. That way, if a position hits our customary 25% trailing stop, you’re only down 1%.
I have turned down many seemingly attractive investments because they required large minimums that would violate the 4% rule. I am not willing to risk my financial health just because an investment sounds good. I’m always guarding against what can go wrong.
Discipline Pays Off
Discipline is not easy. If it were, McDonald’s would be out of business and everyone would have shredded abs. But adamantly sticking to a few simple rules can vastly grow your wealth and reduce your financial stress in a meaningful way.
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