For long, I thought that asset allocation combined with the right investment instruments can lead you to success in investing. There is no dearth of research to prove that asset allocation itself accounts for more than 90% of the returns of a portfolio.
Once you realise this, the whole investing operation undergoes a change. It did for me. I went around tom-tomming the same principle across to everyone.
Turns out, I was so wrong.
Asset Allocation is NOT THE MOST IMPORTANT THING in investing. There is something bigger, far more important than asset allocation.
It is Temperament.
Carl Richards, known for his sketches at Behaviour Gap gave us this masterpiece.
Repeat until broke!
More than 95% of the investors succumb to this cycle of fear and greed. You may be a follower of any investing style – value, growth, momentum, day trading, options – the phenomenon affects everyone, without bias or prejudice.
May I request you to look back at your actions and see if they fit those curves?
Vishal at Safal Niveshak wrote another beautiful post on Why most people will never succeed at investing? It includes this one simple graphic, which explains it all.
I am sure you are smiling.
We know how we have let our time be divided between investing and non-investing.
If I were to go a step further and say, what matters in investing, this is what it looks like.
Investing success is really 99% temperament. To be able to take a deep breath, calm your mind, to dissociate yourself from the noise and think unbiasedly to take actions that are aligned with your values and requirements.
You will need it in the worst of times, the toughest of times, even the best of times.
It will help you set and then remember the rules to keep yourself on the path, to prevent you from hurting yourself and your portfolio.
I say it again, temperament is the most important thing. Without it, there is no way you can succeed with investing.
How to fail at investing?
Well, hopefully you know now.
Just let your temperament go!
Rudyard Kipling, in his famous work,”If“, writes:
If you can keep your head when all about you
Are losing theirs…
If you can wait and not be tired by waiting,
Or being lied about, don’t deal in lies,
Or being hated, don’t give way to hating,
And yet don’t look too good, nor talk too wise:
If you can dream—and not make dreams your master;
If you can think—and not make thoughts your aim;
If you can meet with Triumph and Disaster
And treat those two impostors just the same;