Why a calm investment philosophy is key to financial success

Investors must ensure that their reactions to events are consistent with their long-term plans

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Investing is a long-term commitment and those who effectively manage family finances often dedicate decades to achieving their goals.

However, the path of an investor is multifaceted, involving complexity, challenges, frustration and occasional fear.

Our philosophy is “stick with your plan”.

Although simple, it’s not easy, and prompts a crucial question: How can investors sustain discipline amid various market conditions, political unrest, economic volatility or any crisis that jeopardises the pursuit of their goals?

Throughout their financial journey, investors confront decisions influenced by both controllable and uncontrollable events.

Without a steadfast guiding philosophy, stress becomes inevitable, potentially leading to detrimental choices that hamper long-term financial well-being.

Often, when outcomes fall short of expectations, blame is directed towards external factors – government, central banks, markets and the economy – rather than self-reflection on responses and decision-making accountability.

Success comes in how we manage our responses to events, not attempting to control the events themselves, according to experts.

Viktor Frankl summarised this beautifully in his book, Man's Search for Meaning, when he said: “Between stimulus and response, there’s a space, in that space lies our power to choose our responses, in our response lies our growth and freedom.”

Think of this equation: Event + response = outcome.

Could an outcome – either positive or negative – be the result of how you respond to an event, and not just the result of the event itself?

This would mean events, while important, don’t exclusively influence outcomes (if this were the case, everyone would have the same outcome regardless of their response).

Consider applying this concept to your investments.

Event: A significant shock, like a bank failure, triggers a market decline.

Response: Fuelled by negative media coverage, there may be a temptation to sell some, or all, of your investments.

Outcome: Succumbing to short-term news can result in missing a market recovery, causing anxiety about when to re-enter, as well as suboptimal returns.

Now, a different perspective.

Event: A bank failure causes a market downturn.

Response: Grounded in a long-term understanding of market fluctuations, emotions are managed and the investment plan remains unchanged.

Outcome: The market rebounds and the investor who maintained discipline reaps rewards missed by those swayed by short-term reactions.

Same event, different outcome based on response. This is why having an investment philosophy is so important.

By understanding how markets work and maintaining a long-term perspective on past events, investors can focus on ensuring that their responses to events are consistent with their long-term plan (often a 40 or 50-year plan and not a one or two-year one).

A philosophy should be grounded in principles supported by decades of empirical academic evidence – trust in markets, forward-thinking (at least five years), diversification and controlling the controllable.

These principles instil confidence during market events, even amid global shifts.

Adherence to these principles is essential in countering claims that “it’s different this time”, preventing impulsive decisions based on fear or uncertainty.

While challenging, adhering to these principles safeguards investors against succumbing to investment fads or scams (even the most self-aware find it hard to manage their own responses to events).

Investing is perpetually enticing and intimidating, but with a strategic approach and guidance from a fiduciary, you can navigate challenging times.

If you’re feeling a sense of drift in terms of your journey, or recognise some of the above scenarios in yourself, talk to a fiduciary.

Sometimes, a supportive conversation is all you need to help increase the probability of having a successful financial outcome.

Sam Instone is co-chief executive of wealth management company AES

Updated: December 01, 2023, 6:02 PM