Four disciplines to financial success
As simple as these things are, they are not easy to do because it requires discipline.
Discipline vs. Conviction
Most investors think that investment success comes with conviction or intuition when really the thing that matters most is discipline.
If you wanted to become financially independent, what would you have to do? What are the important disciplines to help you get ahead financially? There are lots of theories out there; some are wacky, wild and crazy. For me, it’s more about common sense than anything else. For me, there are four key disciplines to financial success
A disciplined savings plan
In order to get ahead, you must put money away for the future. It requires a certain level of discipline to put away money on a regular basis. A forced saving plan is simply one where you have money debited out of your bank account each and every month. David Chilton popularized the phrase pay yourself first. The reality is it matters less what you invest in and more that you maintain a discipline to put away something regularly. There are two key points to remember: It’s never too late to start and the more you save the more choices you have for the future.
A disciplined spending plan
A disciplined investment allocation plan
The problem is diversification has been treated more like an art than a science. For most people diversification is more about quantity rather than efficiency. In a recent study, the average number of mutual funds held by Canadians is somewhere between 15 and 20. In most cases, you can optimize a portfolio with 5 to 12 funds.The key is to have a properly allocated investment plan and then having the discipline to stick with that plan. The most successful money managers like Warren Buffet, Sir John Templeton, and Peter Lynch are successful because of adherence to their discipline. And yet they all have different disciplines.
A discipline to rebalance
In a previous article, I showed the financial merits of rebalancing. Little did I know that I would include re-balancing as one of the key traits to financial success? Once you have an investment plan, rebalancing helps you to make the best long-term decisions year after year.
According to Investopedia.com, rebalancing is simply the process of realigning the weighting of a portfolio. Through rebalancing, you will always sell higher and buy lower. Although we know that buy low, sell high is supposed to be the best strategy to invest, it is also the hardest to implement because it require overcoming significant psychological barriers to chase investments that have done the best. Just think about it, when you look at your investment statement and you see the investments that are doing poorly versus the ones that are doing well, what is your first inclination? Is it to get rid of your losers and buy more of your winners? Success comes in doing the opposite and that takes discipline.
So there you have my four disciplines to financial success. Did I miss any other disciplines worth sharing?
Stay true to your disciplines and success will follow. Good luck!