Originally published: April, 2004 (Phillips, Hager & North Investment Funds Quarterly Report)

Context of the article: Being successful at investing is hard. It takes discipline, patience and courage. If investors don't possess those traits, they should consider other alternatives. The alternatives include hiring a professional to do the investing or building "automatic" disciplines into their process, which serve to take the emotion out of it and lessen the need for courage.

I spent some time in our Call Centre during the most recent RRSP season and it provided me with some sobering reminders. First, I had to accept that I was mostly getting in the way, and that I should leave the incoming calls to our talented and enthusiastic front-line staff. I was also reminded how many individual investors are without a long-term investment plan and are being guided by a rather arbitrary time constraint - the federal government's RRSP contribution deadline. PH&N investors are better than most, but we still work with a lot of last-minute RRSP contributors.

This experience brought to mind some words from our Chairman, Tony Gage. Lately I've spotted him wandering around our office muttering three words: discipline, patience and courage. When asked about it, he grumbles something about the fact that the best investors need to have all three of these attributes.

Tony's grumbling is his not-so-subtle way of pushing and prodding our investment managers, the people who buy and sell securities for our clients' portfolios. And while these words are aimed at them, the three principles also apply to clients who are doing their stock and bond investing through mutual funds. Let me take a shot at translating what Tony is talking about.

Discipline means sticking to your strategy. Not wavering from your plan or losing sight of your long-term objective. It's hard to be disciplined, however, if you don't know what you're going to be disciplined about. At its most basic, this requires that you know what you're good at, and just as importantly, what you're not good at. The best way to be disciplined is to have an investment plan. Something that's written down. Something that will remind you what your objectives and timeframe are. Something that specifically defines your long-term asset mix.

Next comes the patience. What Tony is referring to here is the fact that investing is a long-term endeavour. It takes time for strategies to play out. We're talking years, not weeks or months. And it's important to remember that successful strategies will go through long periods where they just aren't working.

For the most part, letting your strategy play out is not going to be very exciting. As I've said many times, long-term investing shouldn't be your only hobby, because it is going to be dead flat boring most of the time.

The third component of being a successful investor is courage. If you're going to be disciplined and patient, you'll also need to be courageous. Part of what Tony is referring to is the fact that the best time to invest in a security (bond, stock, real estate) is when it feels the worst. The best opportunities don't come gift wrapped with a bow. They'll be covered with dust and dirt, and undoubtedly they'll have a few warts. They'll come with uncertainty, and possibly even controversy. The best investment opportunities definitely don't come with positive reinforcement from friends, family or the media. You'll feel pretty lonely. Thus, the need for courage.

To illustrate the point, let's look at an example that is still firmly imprinted in our psyche.At this time last year, we were in the final weeks of a three-year bear market. It looked like stocks would never go up again.

At the time, most of the advertisements and expert opinions were steering investors towards safe, conservative investments. Looking back now, it seems obvious that last year was actually the best time to take some risk, perhaps even be a little greedy. After all, stocks had been going down for three years and were at rock bottom. Well, it's easy to say that now with the benefit of hindsight. In reality, it took courage to put your RRSP contribution into an equity fund in early 2003. It took courage to rebalance your asset mix so you were back up to the equity weighting you'd set out in your investment plan. It took courage to ignore the fact that when you'd bought equities in the previous two years, they'd proceeded to go straight down.

Discipline, patience and courage. These may sound obvious, but the reality is that there are very few investors that have all three of these attributes.

If you're not one of those rare people, you have two options: you can carefully select a professional to do the investing for you. Or, you can cheat. The first option is probably the best (I'm obviously biased here), but the second is pretty good, too.

By cheating, I mean building some "crutches" into your investing process. We shouldn't be bashful about using as many crutches as possible. The goal is to make investing simple and mechanical. Make it hard for your emotions to get involved. There are a number of ways you can cheat.

In your financial plan, lay out the long-term asset mix you intend to follow. This is your foundation. It takes into account your age, retirement needs and tolerance for risk. It's the most important decision you're going to make about how you'll reach your objectives.

Restrict how often, and by how much, you're allowed to change your policy asset mix. I'm not suggesting you shouldn't adjust your mix from time to time (as far as I know, this aging thing seems to be unavoidable). But if you let yourself play around with the policy mix any time, you might as well not have one. The time when you're most likely to change your policy asset mix is when you absolutely shouldn't  when you're thinking, "I just can't stand it any more!" Instead, take emotion out of the equation ... diarize to discuss your asset mix with your advisor every three years or so, and only allow yourself to make adjustments at that time.

Set up a regular contribution schedule. You can do this by making a note on your calendar or by using pre-authorized chequing. PAC is the ultimate way to cheat because it's mechanical and unemotional (on predetermined dates, money is transferred from your bank account to your investment account without you having to lift a finger). Every contribution is in line with your long-term asset mix. And, by making a number of small contributions throughout the year, you'll be less inclined to try timing the market.

Use new contributions to rebalance the portfolio back to your long-term asset mix target. Let's assume your asset mix target is 70% equities and 30% bonds. If the stock market has been strong and you haven't made any adjustments, your portfolio will have drifted, perhaps up to 75-80% equities. The cheat in this case is to react mechanically, devoting your new contribution(s) to buying bonds, and getting back to the asset mix your investment plan calls for.

Have a regular schedule for rebalancing your portfolio. If your regular contributions aren't keeping your portfolio in line with its target, then you should diarize to rebalance from time to time. Have a regular schedule for rebalancing your portfolio. If your regular contributions aren't keeping your portfolio in line with its target, then you should diarize to rebalance from time to time. Over the decades, there will no doubt be times when you will say to yourself, "I can't stand it any more" or, conversely, "This is too good to be true." It's at these times that our Chairman's grumblings come into play. These are the times when you must have discipline, patience and courage. That is, if you're not cheating like me.Technorati tags: steadyhand