3 Rules to "Handicap" Your Investment Strategy That Will Totally Pay Off

Among the things that make investing such a challenge is that the people who are doing it are... well, people. We're emotional. Inconsistent. Prone to second-guessing ourselves. And that's when things are going well. But there are ways to engineer your investment strategy to help you avoid the drags that such behaviors can lead to.

For an example of that, consider this segment from this Rule Breaker Investing podcast, in which Motley Fool co-founder David Gardner describes the restrictions he and his brother Tom put on themselves when it came to managing the Stock Advisor portfolio. He -- and the listener whose question kicked off the commentary -- describes those limits and rules as "handicaps," but in reality, they are anything but.

A full transcript follows the video.

This video was recorded on Nov. 28, 2018.

David Gardner: Rule Breaker mailbag item No. 2. This one comes from Mahmoud from Jeddah, Saudi Arabia. He writes, "Hi, David. Thanks for answering my previous question on when to add to your winners. I was listening to a recent RBI podcast, the one entitled 200 Stock Advisor Picks Later. You were talking about handicaps that you and Tom put on yourself with Stock Advisor -- for example, picking two stocks a month, having a set date to announce these picks regardless of how the market or the stock price is doing, etc.

"This got me thinking," Mahmoud says, "do you think Stock Advisor would have performed better without these handicaps? I believe you said Stock Advisor performed better than many hedge funds because of these so-called handicaps. My question is, what kind of handicap should investors put on themselves to do better? Perhaps not allowing themselves to sell during a 'correction?'" Mahmoud suggests. He puts that word in quotes, and immediately writes, "Sorry, I know you hate that term." And you're right. I've covered that on other podcasts. I never use the word correction. It's almost always used by people to describe a market drop, and that doesn't sound correct to me. If anybody looks at a graph of the Dow Jones Industrial Average over the last century, you'll see what's correct is that the market goes up over time. So, corrections, I think, are misnamed. But you already knew that, Mahmoud.

You go on, "Or maybe forcing themselves to add to a winner on a specific day of every month? Keep up the great work," he says. "Thank you and your team for everything you do. P.S. I actually live in New York, but that's less exciting than having a listener from Jeddah, and I am from Jeddah. Signed, Mahmoud." Thank you very much for writing in, Mahmoud!

There are three handicaps that I want to speak to that I would recommend that you handicap yourself with. I recommend these handicaps for all investors. The first one is, I'm going to handicap you and me -- and we do this in Stock Advisor and, indeed, the whole Motley Fool business -- with making a lifetime commitment to being an investor. The handicap there is that we're going to be basically keeping our money in the stock market the rest of our lives. At a certain point, as we near retirement, you might start pulling some back out. And no doubt, a lot of our listeners have fixed income or real estate, other things besides the stock market. But handicap No. 1 that we operate with every day here at The Motley Fool -- we're in our 26th year of enjoying this handicap -- is that we're all lifetime committed to the stock market and to investing. A lot of people don't. They jump in, jump out. We're handicapping ourselves against that.

No. 2, I think that regular investing -- as you mentioned, we pick one stock, each brother, every month in Stock Advisor. Our other services act similarly. We're handicapping ourselves by not saying, "We're going to buy three stocks that month, and then this other two months, the market looks high, so we won't buy any stocks." We're not even going to play that game. We're simply going to regularly come in and say, once or twice a month, a lot of us with jobs are getting a paycheck twice a month, so maybe twice a month, you're going to invest that money. It doesn't matter whether you think the market is high or low.

By the way, quick mention that if you do think you're good at timing the market, you may well be better than I am. Perhaps you don't have to handicap yourself this way, Mahmoud, or anybody listening. But this is something that we do at The Motley Fool, and I recommend this handicap to all.

The third and final one is, you don't always have to buy all of a position at once. I'm going to handicap you if you're nervous about entering a stock by saying you're not allowed to buy it all at once. You can't put all the money that you'd want to put in that stock the first day. Here, often at The Fool, through our best buys now and our services like Stock Advisor and Rule Breakers, we give ongoing reasons to continue purchasing winning companies over the course of time. And that handicap has indeed helped us to outperform many others.

I hope that shortlist was helpful, Mahmoud. Thank you for writing in from New York but saying it was still Jeddah! We do appreciate that humor here at The Fool.

Oh, my gosh, is it The Motley Fool's chief investment officer who just walked into the studio?! Andy Cross, how are you doing?

Andy Cross: Hi, David! How are you?

Gardner: Really well! Andy, you're here to join in with me for the next couple of mailbag items, but you've also been handicapped with these handicaps over the course of 20-plus years here at The Motley Fool. Do you have any other thoughts?

Cross: I don't consider it a real handicap, David. In fact, I think it brings much needed discipline to individual investors who, if they're taught anything at all, it's about jumping in and out of stocks, maybe investing in penny stocks, maybe investing in the next hot thing they think might go up or down. I think having the discipline of regularly investing in these fabulous companies that you and Tom have found in over 20 years of investing and certainly through Stock Advisor, I think that discipline of investing, whether the market's high or low, whether we're in an election cycle, whether it's Republican or Democratic administration does not matter, whether it's a recession or not, the discipline to investing through all of those times when the rest of the people are focused on other things really brings a value to the way that we've helped investors invest. I think it's a big contribution to our performance.

Gardner: Awesome! I agree, Andy. Yes, you're right. When we were using the word handicap here for mailbag item No. 2, it was generally in quotes, and we're having a little bit of fun with that. It's a really good point that Mahmoud has made -- we think that these handicaps would serve many others if they were similarly handicapping themselves.