The single largest factor dividing successful investors from others is discipline. Discipline is choosing between what you want now and what you want most. Investors who stay focused on their key long-term goals tend to outperform others and often in dramatic fashion. With the broad stock market at record levels, will you have the discipline to stay put when the next temporary decline occurs? Let’s look at how you can give your discipline a boost and avoid reacting and running.
Handling Investment Stress
The first and most important question to consider when investment stress arrives is this: Have your goals changed because of current market conditions? If not, that is your answer and no significant portfolio changes should be made. Knowing that you are focused on what you want most should help bolster your discipline.
The second and perhaps most practical method for staying disciplined is to rebalance your portfolio once a year or so. This rebalancing should take the portfolio back to the original portfolio allocation targets. There are numerous studies that indicate regular (once or twice a year) rebalancing produces better returns over time even taking into account trading costs and taxes from realized gains. More frequent re-balancing is subject to strong debate and the data is much more mixed. Therefore, relatively small variances from the original portfolio allocation targets should be expected and tolerated.