Investors have a lot of websites, people, and companies providing opinions. Some of it is good advice, while some is not so good. The challenge for most of us as investors is deciphering what we should listen to and what we should ignore. I have found it helpful to ‘triage’ the information around knowledge, confidence, and discipline. There does not seem to be an order of importance, just that they are interconnected.
Knowledge, at its core, is about only investing in investments you understand. Warren Buffett is famously known for avoiding investments in industries he does not completely understand. The Berkshire Hathaway (NYSE:BRKA) CEO has managed to avoid peer pressure and the desire to find the next hot stock by simply investing in his circle of competence — a crucial lesson all investors should keep in mind.* Knowledge is not expertise either. With all the information out there on investing, I have seen too many investors think because they are knowledgeable, they are experts. Investing means risk. And though someone is knowledgeable, when the markets do correct, I have seen investors lose confidence in their strategy and make some very costly mistakes.
Confidence seems to be a combination of controlling one’s emotions during market turmoil and focusing on what an investor can and does control. Many people struggle to separate their emotions from investing. Markets go up and down. Reacting to current market conditions may lead to making poor investment decisions at the worst times. One strategy I have found to instill investment confidence is to have a plan (an Investment Policy Statement) in advance of market turmoil. Lastly, when building and managing your investments, do not try to control the ups and downs of the market. Focus on the part of investing you can control…such as investment costs, portfolio risk, the quality of the investments in the portfolio, and taxes.
Discipline is where expertise and knowledge will sometimes separate. Daily market news and commentary can challenge your investment discipline. Some messages stir anxiety about the future while others tempt you to chase the latest investment fad. When tested, consider the source and maintain a long-term perspective. Another helpful strategy when it comes to discipline is to have a portfolio that is diversified. Diversification helps reduce risks, but diversifying within the US is not enough. Global diversification can broaden your investment universe.
In summary, when you are making investment decisions for yourself or when using a financial advisor, try to focus on these three points — Invest in investments you understand. Have an investment plan in writing. And build a diversified portfolio, then stick with it!