Apply self-discipline to investing

You must be careful in your stock selection process to give yourself a reasonable chance to
succeed with the waters of the market so turbulent these days.

 One of the keys to investing success is discipline. Without it, you’ll probably end up with a
 rag-tag collection of stocks that produce indifferent results or even losses.

If you apply rigorous self-discipline to your equity selections, you should at least stay out of deep trouble and you may end up doing very well for yourself.

Spread risk

• You need discipline in constructing your portfolio.

It must be as diversified as possible to spread your risk across a number of companies and industry groups.

But it must not become so unwieldy that you can’t easily keep track of the companies you own and how they’re performing.
 
A well-constructed portfolio of 10 to 15 stocks is probably about right.

Selection process

• You need discipline in your stock selection.

You’ll be bombarded with advice from all sides, some of which will be difficult to ignore. Even though you carefully lay out your investmt philosophy to your broker, he or she will almost certainly be on the phone to you with recommendations that don’t fit.

You’ll hear hot tips at cocktail parties. You’ll read articles in the media. You’ll receive glowing research reports about attractive issues. You’ll get enthusiastic calls about exciting IPOs.

And you’ll quickly discover that your biggest problem will be ignoring these tips and sticking with your game plan. But that’s essential to success. Never place an order until you know exactly how the stock fits in to your overall objectives.

Selling tough

• You’ll need discipline in selling.

Buying stocks is easy. Selling is always a wrench. If the stock has climbed, you’ll be reluctant to let it go because it may move still higher.

If it has dropped, you’ll be reluctant to sell because it means locking in a loss. There never seems to be a right time to sell. Sooner or later, however, if you want to secure your profits, you have to sell.

Next page: Well-defined goals

Well-defined goals

• To be disciplined you must have a well-defined philosophy and goals.

Write these down at the outset and review them periodically. Don’t buy stocks that don’t fit the philosophy.

Ask yourself whether the portfolio you’ve put together meets your goals and, if not, where and how you got off track.

And make sure your objectives are still valid. All things human change. If you decide to switch direction, fine. Just be sure you know why you’re doing so and how you plan to proceed.

Adapted from the book 6 Steps to $1 Million by Gordon Pape, published by Prentice Hall
Canada.