This is the fifth — and final — in a series of Money and Markets columns where I’ll share with you the five essential building blocks that can help you successfully earn enduring gains in your portfolio.
Today, I’ll complete the discussion with a building block you must have to grow your nest egg …
Discipline is the glue that binds everything together in investing. It’s the trait that leads to consistency. And it is the consistent application of a well-designed and thought-out system that allows you to rack-up successful investment results over and over again.
|Discipline binds the pieces together.|
Discipline — by itself — will not make you a winning investor. Recall, from my previous columns that profitable investing requires four other elements:
But without discipline, all is lost.
As an illustration of discipline, consider Ulysses in Homer’s epic The Odyssey. As the poem goes, Ulysses longs to hear the Sirens’ beautiful voices even though he knows that doing so will render him incapable of rational thought.
To protect him from the call of the Sirens, Ulysses ordered his crew bind him to the ship’s mast so that he won’t jump in the water and drown. Consequently, the ship maintained its course. And when the danger had passed, the men freed Ulysses.
In the same way, investors can also react irrationally, especially when experiencing that euphoric feeling that comes with placing a successful trade or riding a winning streak.
Like Ulysses, you should take the steps necessary to eliminate the temptations to act badly. Focus on the significant financial rewards that can be achieved over time and ignore the short-term call of the latest market trend. Fortunately, you don’t have to do something as drastic as having friends tie you to a ship’s mast …
You just need to recognize that it’s over time — not overnight — that enduring profits are earned in the financial markets.
An Example Using Discipline
As an example of an investment that uses extraordinary discipline in its investment process, consider the Sit Quality Income Fund (SQIFX). This recently launched fund is an excellent medium-term alternative to putting your cash reserves on deposit at a bank.
In an environment where yield is hard to find and earning any return on cash is challenging, SQIFX’s 1.79 percent annualize yield represents a significant premium over comparable investments such as certificates of deposits and Treasury bills.
SQIFX balances its fixed income investments across all sectors. The fund’s diversified portfolio has an average duration of 1.4 years and an average “A” credit quality rating, which combine to provide a high-quality cash alternative to traditional cash investments.
Applying discipline to a selective investment process enables Sit Investment Associates — the SQIFX’s manager — to focus on sectors and security structures that provide incremental yield while managing credit risk.
P.S. If you’d like to follow along with me as I issue “buy” and “sell” signals while using these five essential building blocks, click here to find out more about my Park Avenue Society trading service.