In 1989, an educator named Steven Covey wrote a book called “The Seven Habits of Highly Effective People” that became acclaimed as one of the most influential books of the 20th century.
As the book’s success illustrated, many people strive to develop and sustain positive habits, including good investment habits.
Sometimes, though, it is possible for good habits to lead to bad decisions. In this post, we will look at how to make sure this doesn’t happen to you.
Three Critical Habits
When it comes to investing, three of the most critical habits include patience, discipline and a long-term view.
We learn to nurture the habit of patience by living through different market cycles and gaining control over the temptation to panic and make imprudent decisions in adverse conditions.
Through experience, we learn that markets go through boom and bust, that today’s paper losses will recover at some point, and that emotional reactions to short-term trends usually result in selling low and buying high—the opposite of prudence.
These habits help us become better investors.
Beware Complacency
But even the best of habits can become counterproductive when they become complacent.
To illustrate this, let’s look at an example of backing a car down a driveway.
In the 2012 bestselling book called “The Power of Habit: Why We Do What We Do in Life and Business,” by New York Times reporter Charles Duhigg, the author uses the “driveway” example to illustrate how the human brain is always looking for ways to be efficient.
Think of when you were sixteen years old, backing a car down your driveway for the first time in your life. Your brain was firing away on all cylinders—looking right, looking left, gauging the amount of pressure on the gas pedal and the brake, trying to remember all sorts of things simultaneously while nervously hoping the neighbor’s four year old kid wasn’t tooling along the sidewalk on his Big Wheel. It was exhausting.
But over time your brain succeeded in converting all these decision activities into habits, vastly reducing the amount of mental perspiration you experience when you pull out of the driveway on your way to work every morning.
Now, imagine that you’re backing a car down the driveway in an unfamiliar setting. The good habits that work on your familiar territory—same time in the same neighborhood every morning—may not help you much in getting out of the driveway of a remote mountain chalet on a snowy, icy, pitch black night.
Like it or not, your brain has to go back into active decision-making mode to navigate the uncertainties that lurk and threaten.
Along the road to your long term investment goals, there are also going to be times when you have to step out of the comfort of the longstanding assumptions that form your habits.
Is your bond portfolio really the safe haven that you assumed when constructing it ten years ago? Are mutual funds always the default vehicle to use for building out your exposure to different asset classes? Should emerging markets stocks comprise no more than 5% of your total assets, given how this asset class has evolved over time?
Mental Fitness
Answering these questions requires the mental energy of active decisions—challenging your existing assumptions, doing research, educating yourself on new developments, and potentially running some numbers around your projected long term goals.
All of this will be energy well spent—and can ensure that those good habits you have developed stay fit and up to date.
Tell us…How often do you re-evaluate your own investment habits?
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