The very first myth in Dan Bortolotti's excellent article on the MoneySense website Busting the Couch Potato Myths is that it is easy to stay the course in following an investing strategy. As Dan says, it is not at all easy! It never gets easy, though it can possibly get easier with the right actions. In fact, it actually never gets foolproof guaranteed that you will not deviate from your plan. Let's explore how this works using a golf game example.
The golf story: One day, a certain blog writer goes golfing with a buddy. The first hole is longish par 3 but with no great hazards or rough, just a nice grass slope gently uphill up to an open green that has a bunker on one side only. To get into real trouble, the tee shot has to go almost 45 degrees askew. [Translation in investing terms, the market looks quite stable and the economy is performing reasonably well, a great time to begin investing one would think]
Looks like an easy start! Except that there is a fallible human golfer [investor] involved. Now this golfer is a high-handicapper (i.e. not very good - an average investor) but he has played enough to know his own penchant for getting upset unlike the rank beginner [i.e. is not a total newbie investor and thus knows that markets can move down] who expects to play like the world number one [who expects markets to always rise], so he mentally prepares himself by thinking as follows "I've not warmed up and hit any practice shots, so if things go bad here, it's no big surprise or disaster and the best thing to do is stay calm and keep at it" [the market might go down some but we won't worry too much, we'll stick with the investing strategy].
That's good preparation [both #1 creating a plan, and #2 learning market history, are excellent first steps, as Dan has noted], but then reality begins to operate. The golf partner's tee shot is very nice and straight at the hole [a peer investor you know starts with a good gain], though just short of the green. The pressure rises to do as well. Unfortunately, our hero's tee shot isn't nearly as good, scuffed out left and only two-thirds of the way to the green. Oh well, that's disappointing but the possibility had been anticipated. No big deal. The next shot is an attempted chip from short rough onto the green, not that hard at all, no bunkers, mounds or other obstacles in the way. A complete duff! The ball moves only a foot. Geez, now that is annoying, the chipping had been so good lately [this latest investment seemed a sure thing but it is going down while the market is going up]. Meanwhile, golf partner makes a chip pretty close to the hole [own investment just sits there, while the friend's continues to move up very nicely].
The next shot is well hit but much too hard and rolls right off the far side of the green. Grr, when is there going to be a good shot [upward move]? The pros [e.g. Warren Buffett in the investing world] seem to stop it within inches every time. The blood pressure is definitely rising. Next shot - needs to be a delicate little chip to the edge of the green since the hole is close to the edge. Another complete duff, the ball moves a few inches! [the investment takes another appreciable drop] At this point, the emotional system suddenly takes over and we will spare readers from an account of the careless, furious series of shots [sell the darn stock!] that followed before a horrible score of 10 finally ended the pain. The partner missed the first put but sunk the next one to record a very respectable, for a high handicapper, single bogey 4 on the hole. It seems that the chance of a good score [profitable investment] has been destroyed on the very first hole [investment month or year]. Were it not for the golfing partner, whose presence made it easier to maintain a certain decorum, the putter might have flown further than the tee shot [#3 it's a good idea to have a neutral investment buddy to talk things over with to avoid the too-rash action we may regret later, like selling everything out at a loss; simply talking about an investment to someone else will assist in restoring calm so that rational thought can supplant emotional reactions; it helps externalize and objectify the problem to move on to sensible decisions].
It is not just the average person who is susceptible to such moments. Those who watch pro golf on TV can observe the occasional similar blow-up, both in shot-making and in self-control, even by the very best golfers. The difference is only that it happens less often and is usually much less severe for the pros. The world number one golfer Martin Kaymer, though already recognized for his calm demeanour, actively works on controlling his emotions. But no one is ever totally immune from bad things happening or from getting unduly emotional, even when the possibility is anticipated. Our own reaction can worsen the results and it is as hard to control our reactions as to make good shots. So it is also with investing.
There are longer term actions, outside the stress moment of a golf or an investment crisis, that bring about improvement: #4 build a feedback loop - go over the incidents afterwards while they are still fresh and ask yourself what you did wrong, what you will change. Part of the revised improved action likely will be: #5 technical practice on shots [collecting more data or doing more analysis]. Another part can be: #6 mental preparation - our golfer partly did that right by anticipating a possible bad outcome and deciding in advance what to do about it, but maybe not enough - only one or two bad shots seemed to be mentally forgivable. We also need to remind ourselves that just as technical practice brings about improvement in fits and starts and it takes time, so does it on the mental side.
Fortunately in golf, as in investing, the first hole is not the end of the round, the final result. At least in golf, it is quite difficult to walk off the course and refuse to play the rest of the round after the first hole, or worse, stop playing the sport entirely [quit investing and retreat into the low return safety of Canada Savings Bonds or GICs].
Following the disastrous first hole, the golfer, more by accident than by design, ignored the score, letting the playing partner keep track, and merely played each hole as it came. [#7 check returns and performance infrequently only when you need to and at a moment you have planned in advance - if you don't know how well or poorly you are doing in the interim, you will be unable to react and deviate from the plan! This presumes you have built a proper plan beforehand - see our post on creating an Investment Policy, part of which specifies how often you will review and make changes to investments] The result was that the shotmaking settled down to what eventually overall compensated for bad first hole and the total score turned out even a bit lower than average [investment returns tend to even out over the long term too, but we must be patient]. A successful day!
May our readers' golf games, or other sporting endeavours, enjoy success ... and may their investing be so too.
Disclaimer: this post is my opinion only and should not be construed as investment advice. Readers should be aware that the above comments are not an investment recommendation. Do your homework before making any decisions and consider consulting a professional advisor.