How to be a “Dispassionate” investor.
Just like scientific training, good investor behavior is a learned skilled.
Rigorous scientific training teaches us to become dispassionate about our data. To be dispassionate means a removal of biases. A dispassionate scientist may create a hypothesis (prediction), but they don’t care if they are right or wrong. They only want to discover the truth.
This can be difficult for 2 reasons.
· Scientists are naturally passionate about their work! Long hours and a 90%+ fail rate are overcome by a love of the discovery process, the patients we serve, and deep curiosity.
· When you work hard to generate data, it is easy to become attached.
When investing, it is natural to desire an increase in in our portfolio value. Thus, we may become emotionally tied to an investment’s performance. When we select investments, it feels good to be validated in our choice when they go up, and it can hurt when they go down.
Despite any emotional connection, good investors avoid emotional decisions. Like a good scientist, they too are dispassionate.
Here are 3 steps you can take to be more disciplined in your investment decisions.
1) Define your time horizon.
A time horizon refers to how long you plan to hold a given investment in your portfolio. In general, riskier investments should have a longer time horizon, and short-term investments should be made in more stable assets. A diversified portfolio may hold both long-term (risky) and short-term (safer) investments depending on the goals of the investor.
When making an investment, decide from the beginning the amount of time you plan to hold it.
2) Make decisions by degrees.
Too often, investors make decisions based on ideas they have only partially researched. They learn of an idea and want to act “before it is too late.” One way to mitigate this type of “leap as you look” behavior, is to make investment decisions by degrees.
For example, let’s imagine you have learned about a new investment opportunity. After your initial research, you decide you would consider investing a maximum of $20,000 into it. Instead of investing $20,000 right off, start with $10,000. Continue learning and monitoring the position for 3 months. If you still feel good about the investment, add $5,000 more, and then another $5,000 3 months after that (A similar strategy can be employed when selling an investment).
3) Seek the advice of others.
Scientists learn early about the value of collaboration. Especially from researchers who think differently than you do. I have never met a scientist that would only show their data to peers at the time of publication.
Similarly, good investors seek the opinion and perspective of others. Don’t create your financial plan or investment strategy in a bubble. Find peers you trust and get their advice. A professional advisor, colleagues, and friends are great resources. If you are naturally aggressive in your decisions, consider finding cautious voices, and vice versa.
There is a popular investing “legend” about Fidelity doing an internal review of their most successful customer accounts. What they found, was that these customers had either forgotten they had an account at Fidelity or had died.
This story is probably not true, but it has become popular because it vividly depicts a true principle: When investing, our natural behaviors tend to work against us. While it’s nearly impossible to eliminate all our biases, cultivating a dispassionate attitude towards our investments (and our data) helps position us to make well-reasoned decisions.