Personal investing

Part 3: How to be a resilient investor

To be a successful investor, you need to understand what you are getting yourself into upfront, make sure you are comfortable, and then buckle in for the ride. But there are periods – like the one we are going through – which will test both your patience and fortitude. Resilience is a key ingredient to get you to the other side. Lise-Mari Crafford explains how you can develop this trait.

Lockdown may have shut the departure gates, but there is no turning off innate wanderlust. In the absence of the real thing, at least there are virtual tours to enjoy from the comfort of our couches, along with other people’s videos, photographs and travel tales.

One late-night journey into the inter-webs found me taking a ride through travelandleisure.com’s selection of the “most terrifying, stomach-clenching, vertigo-inducing, adrenaline-pumping” rollercoasters. I learnt that Dubai’s Formula Rossa is the fastest rollercoaster in the world. It launches riders from zero to 150 miles per hour in five seconds. The ride only lasts 90 seconds, but by the sounds of things it will take a lot longer to recover. Next up was the Kingda Ka from New Jersey, the tallest rollercoaster in the world. It reaches over 45 storeys before sending riders hurtling down at 128 miles per hour — a speed reached in just 3.5 seconds. Meanwhile, California’s Full Throttle boasts the tallest and fastest vertical loop in the world. Apparently while you’re riding, the coaster feels unpredictable. It lurches around, switching direction several times. And setting the record for the most G-force of all, is our very own Tower of Terror, found at Gold Reef City in Johannesburg.

The Tower of Terror is not the only South African experience to leave you feeling breathless: Being an investor in the wake of COVID-19 has proven to be quite an adrenaline-pumping pursuit. Investors have been hurtled from the peak of elation to the depths of despair, thrust from side to side, and forced to endure ongoing uncertainty. It is no wonder many of us are questioning our choices.  

Rollercoaster rides last a matter of seconds, and then you are back on terra firma. Investment managers encourage us to stick to our objectives – not an easy feat when each headline is more negative than the last; when everything is unpredictable; when intuition is telling us to run for the hills. Even with a well-thought-out strategy your resolve may be seriously tested.

What is to be done?

No matter how good your strategy is, being willing to stick to it is key to achieving your financial goals. This is true for many things in life – it’s no good having a great eating plan or membership of a high-tech gym; seeing through your plan is vital to achieving success.

But this is easier said than done. What do some people have that helps them stick to their plans like the rollercoaster to its track? The answer is grit.

Angela Duckworth, the world’s leading expert on “grit”, defines this quality as “passion and sustained persistence applied toward long-term achievement”. Gritty individuals approach tasks as a marathon not a sprint and know how to stay the course. According to the South African College of Applied Psychology, gritty individuals display five characteristics:

The good news about grit is that, unlike talent, which is innate, grit can be developed over time, and is a useful muscle when reaching for long-term goals – including investing.

So, what are the steps to take to become a more gritty investor?

New York Times best-selling author James Clear suggests these three steps:

1. Define what grit or mental toughness means for you

When it comes to investing, this could mean changing your mindset and the way you think about your finances. It could be about becoming more future-focused (as discussed in Part 1 of this series), or about sticking to your convictions when others are trying to sway you. 

2. Build grit with small wins

We often think that grit is how we respond to extreme situations – such as the pandemic we are living through right now – but actually, grit can be developed through our responses to everyday circumstances. Choose to save when it would be easier to consume. Prove to yourself that you can do it, in small ways, every day. 

3. Build strong habits

Grit isn’t about getting a dose of inspiration or courage. It’s about building habits that allow you to stick to your plan and overcome challenges. It’s about having a debit order in place – and then choosing to top up your investments if you receive a windfall. It’s about knowing that this is good for you and not seeing this as a sacrifice.

As you grow and develop grit within yourself, you may find that you start seeking out the quality in others. If you are going to partner with an investment manager, ask these questions to understand their level of grittiness:

1. Does your investment manager have a proven investment philosophy? The investment philosophy is how an investment manager thinks about investments. It is the DNA that drives the way an investment manager invests. You’ll find it incredibly hard to stick with your manager when the going gets tough if you don’t understand how they invest. If you don’t understand and buy into their approach you may land up disinvesting at the wrong time, locking in losses. 

2. Will your manager stick to their philosophy? Investment philosophies are only as good as their application. To judge the merit of an investment manager’s philosophy, it is important to assess their behaviour relative to their philosophy over a long period of time and preferably through several market cycles.

3. Does your manager construct resilient portfolios? If resilience is about recovering quickly from difficulties, how can this be applied in the context of your investments? Does your manager think about this when it comes to constructing a portfolio that can deliver results in multiple scenarios? (We will talk more about this in Part 4). 

4. Does your manager have courage in their convictions? How does your manager behave when the going gets tough and the market punishes shares that they favour? Do they use the opportunity or head for the hills? Do they demonstrate bravery and perseverance in the face of adversity? Will they see things through?

These are all important questions when it comes to your hard-earned money.

Rides at a fairground come with a full health warning before you jump on. Unit trusts try to do the same by indicating on their factsheets what sort of ride you can expect as an investor. It doesn’t take much to read a label, but it requires grit to see your choices through. 

This article forms part of a five-part email series. To subscribe click here.

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