Disciplined and Careful
By John Johnson on September 3, 2021
Disciplined and Careful has been part of our culture for years. It started with a comment by our founder, Tony Morgia. “The fear of the downside must be greater than the greed of the upside.”
Unpacking this statement starts to speak volumes about our firm. As wealth managers, our clients are looking to us to provide a meaningful return on their investments. They are also counting on us to help protect their assets to help them meet their retirement goals.
On one level, Tony’s statement is simple. Let’s not chase atmospheric returns with the trending stock of the day. Keep a healthy respect for the swift changes in the market that can be brutal. After all, everyone wants to avoid a permanent loss of capital.
Digging a little deeper, it’s based in math. The more significant the decline in a portfolio, the greater return is required to bring the value back the amount before the decline.
The math alone should be enough to convince anybody that having a healthy respect for the downside is critical. Afterall, double the decline (30% to 60%) requires 3x returns (50% to 150%). An 80% decline requires 400% to return to the starting point!
Everybody should want to be disciplined and careful.
However, it isn’t that simple. What exactly does it mean to be “disciplined” and “careful?” Let’s take a deeper dive into each word.
Disciplined
A disciplined mind leads to happiness, and an undisciplined mind leads to suffering.
Dalai Lama XIV
How do you even begin investing? You need to work hard, earn money, and spend less than you make. That takes discipline.
Now that you have money to invest, how do you know which strategy to deploy? It takes discipline to patiently do all the homework and research required to hone in on a financial strategy that you can follow over the long-term. You’ll also need to consider tactics, plans, and contingencies. All while continuing to work your primary job, manage expenses and save. Tired yet?
Now… once you have settled on your strategy, you will need discipline to stay on course.
Tough times will try to scare you off course… you must stay disciplined.
Good times will try to tempt you off course… you must stay disciplined.
Long times may start to bore you off course… you must stay disciplined.
Trying to keep up with the Joneses may pressure you off course…you must stay disciplined.
Life itself will constantly conspire to knock you off your financial path. Only the disciplined investors will make it through.
Discipline is what allows you to persist over time so that you can tap into the long-term compounding that eventually turns money into wealth.
Careful:
“No, that is the great fallacy: the wisdom of old men. They do not grow wise. They grow careful.”
― Ernest Hemingway, A Farewell to Arms
Careful matters. In our earlier graph, an 80% mistake takes 400% returns to get back to the point where the mistake was made. Careful matters.
What is careful? Careful is a healthy respect of risk and planning to manage that risk the best you can. This risk can exist in your asset allocation, inflation, liquidity, credit, debt load, estate plan and the market. You think your will was well constructed and your estate grows. Fast forward a few more years and your granddaughter’s ex-husband is living in your house, spending your money. Careful matters.
We all know the market is a risk but, think about it from the perspective of the level of returns required to earn back your money after a costly downturn. Now think about all the trying times in just the near past – the dot.com crash of 1999 – 2000, the real estate crash and financial crisis of 2008, and the COVID pandemic of 2020.
You won’t avoid all trouble. Your portfolio will undergo stress. You will not make it through your financial life unscathed. However, careful planning and prudent awareness of your risk profile can help you mitigate these problems, contain them, and prepare you to move forward.
Links:
https://www.morgiawm.com/who-we-are.html
https://www.morgiawm.com/tony-morgia.html
https://www.morgiawm.com/morgia-101.html
