Regardless of how often investors hear about the importance of discipline, we're all tempted to go with our gut. It happens all the time. In a bear market, it can mean sitting on the sidelines until prices fall just a little more. In a bull market, it can mean giving in to euphoria and buying a stock just because it's going up.
Nobody can predict with 100% certainty what the stock market will do. And thinking you can often causes more harm than good. If you're "right" a few times, it can set a bad precedent and give the false hope of sustainability over the long run.
But that doesn't stop us from giving in to the temptation. I can speak from experience.
Playing a losing game
I've generally been good about keeping myself on an investing schedule using dollar-cost averaging. When you dollar-cost average, you choose set intervals to make set investments and stick to it, regardless of a stock's price at the time.
My main purpose for dollar-cost averaging was discipline. I knew if I put myself on a schedule, I would be less likely to care about daily stock movements and more likely to stick with investing. I was consistent with it. I would make my biweekly investments and largely ignore daily stock movements. And it worked well -- I was more focused on how well businesses were performing than their stock price on any given day.
Then came the mid-2020 bull market -- and out went some of my discipline.
We all know that feeling of waiting to do a little more research on a stock only for it to soar in the meantime. That's why it can seem so sensible to buy more when stocks are rising: Why not hurry and buy shares today when they will be more expensive later, right?
Well, just ask me about Peloton Interactive (PTON -0.28%). From April 2020 to December 2020, I invested money into Peloton much faster than usual because of how fast the stock was rising. Nothing about Peloton made it seem like a worthy exception to my dollar-cost averaging rule other than my belief that the company was in the right place at the right time and able to capitalize on the new at-home normal. In retrospect, it may have been shortsighted, but I didn't want to miss out.
Over that time frame, the stock increased by over 460%, and I felt like the smartest investor around. Ask how I felt when the stock was down more than 90% from its highs less than a year and a half later.
NASDAQ: PTON
Key Data Points
Don't make it more complicated than it needs to be
Will you overpay for stocks when you invest on a set timetable? Yes. You can't avoid it. But you'll also buy when stocks are undervalued, at times when you might ordinarily hesitate. And through it all, you're maintaining your discipline, letting neither fear nor greed influence your decisions.
The best investors aren't those with the highest IQ or the ones who do the most research. And they aren't the people with the best technology or the most money. Typically, they're people who can be most disciplined. Money is already an emotional topic for many people. Don't add to these emotions by letting short-term volatility cause you to make impulsive decisions that can be counterproductive to your long-term goals.
Unfortunately, my lapse of discipline came with a hefty price tag, but having experienced that, it reaffirmed how important sticking to a set investing schedule was for me. Now, my investing schedule and the set amount are non-negotiable, no matter how much I think I may be missing out.
In the grand scheme, it doesn't matter much if a stock is up today, down next week, up next month, and then down next year -- as long as the long-term results are there. Trying to chase these trends can be emotionally draining and financially unproductive. Stay the course, and you'll more than likely be glad you did.
