Back in 2015, Rick Ferri told Forbes about his six rules for disciplined investing. The first three are the simplest, requiring research and diligence in sticking to the task:

  1. Have a long-term investment philosophy.
  2. Form an asset allocation based on that philosophy.
  3. Select investments to represent asset classes in the allocation.

The remaining trio consists of steps requiring discipline:

  1. Maintain the portfolio through all market conditions. (Markets do not remain at the same level for long, so re-balancing is what maintains the chosen proportion of each asset class.)
  2. Don’t change the asset allocation due to recent market activity.
  3. Don’t hold back on making new investments while waiting for market clarity.

How investment professionals add discipline:

A wise commentator once said that the biggest benefit of hiring a professional to manage your money is not that they will be able to beat the market—it’s that they will beat what you could do left to your own devices. Sheaff Brock CIO Dave Gilreath is experienced with asset allocation and portfolio management.

There are often several “layers” of professional discipline at work in managing an investor’s portfolio. An individual client might use the help of a financial planner to craft a general assets allocation plan, while money management operations professionals select and trade the individual securities that make up each account, taking advantage of cost efficiencies and opportunities without sacrificing the overall, coordinated, well-thought-out, long-term strategy for that individual investor.

Each “layer” of the overall operation functions with discipline.

Financial planning-level discipline:

The advisor, through a series of planning conversations with the client, helps determine an asset allocation plan based on the client’s risk capacity and risk tolerance.

Fund manager-level discipline:

Asset managers devise a system for analyzing different industries and individual stocks within each of those industries, arriving at criteria to be used in judging both downside risk of each security and upside potential. Decisions will be made about how frequently to conduct investment reviews and what measurements are to be used in “qualifying” or “disqualifying” individual securities for inclusion in the portfolio.

Investor discipline:

The most important aspect of discipline for individual investors is to avoid looking at the portfolio too often, over-reacting to small movements in price, and then making the mistake of doing too much trading—usually at the wrong time.

The more processes and policies are set up ahead of time, the more the results will be governed by a rational, not an emotional framework. Individuals, encouraged and strengthened by interacting with their trusted advisors, allow the portfolio managers to practice diligence in managing the assets.

Discipline and diligence make for a powerful duo in the world of investing.

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