Want to be a great investor? Get used to being uncomfortable

Written by multiforte on . Posted in News

Recently, we set off from Kirribilli for a twilight sailing race on Sydney Harbour.

The evening was perfect – warm weather, clear skies and a good breeze.

What we (well, Kate anyway) hadn’t quite anticipated was how strong the breeze was, nor how sizeable the swell.

Within about 10 minutes of the start, Kate (at the front of the boat on the headsail) was drenched – from head to toe – and feeling very chilly.

Now while it would be nice to do a quick change into wet weather gear, when you’re racing, and there’s only two of you on the boat, there’s no time to “down tools” and change your clothes.

You learn that being cold, wet, and uncomfortable is a normal part of racing.

For the thrill of screaming along Sydney Harbour, and for the thrill of wining the race, you choose to be comfortable with being uncomfortable.

It’s a pretty good lesson for most things in life, don’t you think? And that includes investing.

If you want to be a great investor over the long run – then you need to become comfortable with being uncomfortable.

The case of international equities over the past eight years is a good example of this.

In 2013, international equities delivered a 48% return for the year. And then in 2014 an annual return of 15%, and in 2015 year-to-date 14%. Most investors would like some of that!

Yet, international equities spent the prior years mostly in negative territory: in 2011, it was -5.6%, in 2010 it was around -2% and back in 2008 it was a nasty -25%.

This reminds us of four of important rules.

  1. Picking the winning asset class to invest in is insanely hard

You only need to look at year on year asset class returns for different asset classes and you can see that they can vary enormously from year to year. No one ever knows for sure which markets will outperform from year to year.

It’s insanely hard. If it was easy, maybe we’d all be rich.

Instead, we recommend holding a well-diversified portfolio, aligned to your comfort level with risk, so that you are positioned to capture returns wherever they occur.

  1. The concentrated nature of gains

A large proportion of the long-term gain in investment in the share market comes from sharp upward bursts. Just missing a few days of strong returns can result in dramatically lower returns than staying invested.

If we consider Australian Shares, if you had invested $1,000 on 1 July 1992 in the S&P/ASX 300 index, your money would have grown to $8,050 by 31 December 2014. If you missed the 25 best single days over that time period your $1,000 investment would have grown to just $2,845.

  1. There’s nothing special about a year

Yale economist Robert Shiller once noted the absurdity of racing to meet one-year goals. “I don’t know why people keep using one year earnings,” he said. “That is the time it takes the Earth to go around the sun. I don’t see any other significance.”

Say your portfolio underperforms the market for 12 months, but by month 19, you’re beating it. While it is helpful to look at annual performance to ensure that your portfolio is on track, it is dangerous to rely on this as the basis for investment decisions.

  1. Doing nothing is sometimes the right action

Doing nothing is sometimes the best thing to do for your investments – yet it’s one of the hardest possible decisions you can make as an investor. If you’re like most people, you have barrage of information coming at you. In the media, there’s a constant stream of people making proclamations of bubbles, crashes, bear markets, double dip recessions and melt-ups. Doing nothing in the face of all this along with the market action we see and hear about on a daily basis is a huge challenge for any investor.

We prefer to only recommend that clients rebalance their holdings once or twice a year – and where possible, to use new monies to do it. We recognise that for some people this is not easy – particularly when it seems that many around them are trying to pick stocks, time markets and trade at every opportunity.

Being uncomfortable is normal

So, as challenging as it may feel, being uncomfortable as an investor is perfectly normal. Just like sailing, successful investors need to have the discipline to accept short-term discomfort for long-term results.


Sources: Dimensional Fund Advisors, The Motley Fool “Good investing hurts” (Dec 2014).