Why It’s Important to Be a Disciplined Investor

Andrew Horowitz
Andrew Horowitz, CFP® November 10, 2016

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Being a disciplined investor is an important character trait of successful investors. Andrew Horowitz, CFP®, author of The Disciplined Investor: Essential Strategies for Success explains the necessity of self-discipline when investing. What is the best way to deal with media frenzy, risk, and drama in the markets?

Being a disciplined investor is more than watching the markets. It also plays into how you discuss financial concerns with your spouse and teach money to your children. Show host Douglas Goldstein, CFP®, brings his wife, BatSheva Goldstein, to the show to discuss their personal strategies for financial discipline and what financial messages they try to convey to their own family.

Follow Andrew Horowitz at http://www.thedisciplinedinvestor.com/ and on Twitter @andrewhorowitz

Watch The Diciplined Investor on YouTube.

Read the Transcript

Interview with Andrew Horowitz

Andrew Horowitz, a certified financial planner, talks to Douglas Goldstein about financial planning: Should you let the news affect your financial planning? What is risk? How do the retirement years look for the baby boomers?

Douglas Goldstein:  I’m excited to have on The Goldstein on Gelt Show Andrew Horowitz, who is a certified financial planner. He’s based in Florida and he also has a podcast called The Disciplined Investor. Andrew, how do you coach people to stay on track when there are events such as elections? People certainly get nervous around this time, don’t you agree?

How Does An Investor Stay On Track With All The Negative News?

Andrew Horowitz:  It’s interesting that you mention that because it’s very pervasive right now. I think that the difference now versus years ago was that when you got your news years ago, it was a day late. You’d get something maybe in the nightly news, or in the newspaper, but these days things are smack in your face. You are getting a text on your phone, or an alert from somewhere else.

I think that is creating an undue amount of agitation and concern. Then you add in the other things that are out there, like the elections in the U.S. or the war someplace else, or the oil crisis or slow-down somewhere else, coupled with negative interest rates in another country. What you have to really focus on, for those investors that are in it for the long haul, is that a lot of things are just noise. As long as you have a diversified approach to your investing, as long as you have solid investments underlying your portfolio, the bottom line is that you really shouldn’t be listening to all the different news.

I have one client in particular, who is incredible at calling market highs and market lows. They do it in a way that they don’t know they are doing it. When the market’s hit a low that really gets gut wrenching and concerning, invariably-     

Douglas Goldstein:  I hear where this is going. You get a call?

Andrew Horowitz:  I get an email or I get a call, “What’s going on? Is it time to sell?” Right at that moment is the time when honestly if you would just push the button to buy, you would be in great shape. Just two weeks ago, I got a call, “You know what? Maybe we should increase risk.” That’s the first time in years that she’s ever said that. I said, “Increase risk? We have over valuations right now. We have a lot of things that are coming up that make the market much more vulnerable to a correction or at least a drop in the midterm. Why would you want to do that?”

She went through it and I said, “You know what, we’re not doing that right now,” but again, that would have been great timing. After all this consolidation and low volatility and low volume to say, “You know what, sell it all right now.” I think that our very nature is oftentimes to do the wrong thing if we’re looking very short term. We have to take a much broader look at the goals, what we’re looking to do, and a longer-term history.   

Douglas Goldstein: Let’s go into the case where someone believes the market is going to be volatile. You say, “Just be cool because we are long-term investors and we shouldn’t be selling out every time we get into a panic.” Do you think there’s anything clients should be doing in order to protect themselves from a possible crash?

Andrew Horowitz:  Obviously there are things depending on what your risk factors are. One of the things that we do is since we manage money in terms of portfolios without client interruption per se, we make the moves. They don’t have to call us about something. Hopefully, we are going to be advanced of what they are doing in our strategy, some of the things that we have done in our strategies.

Some of the things that we have done are to bring down equity exposure over the last year. We have changed dramatically the bond portfolio exposure, the maturities and duration of bonds, because we think that there’s just not much more opportunity on the upside with fixed income. Frankly, there’s a lot more downside opportunity with fixed income.

You can get yourself out of some of the more aggressive areas, maybe some potentially emerging markets, emerging market bonds, junk bonds, long-term dated treasuries or corporates. Look at moving from a small cap to a more, large cap kind of exposure. More of a defensive posture if that does concern you. If that doesn’t make you feel any better, there are other options. There are things like hedging a portfolio, utilizing options, or possibly even going short on some indices to hedge some of the losses. That’s a shorter term process, though.     

Douglas Goldstein:  Some individuals say, “I’m concerned I’m going to short the market or buy puts.” Is there a different way for an individual investor to deal with that question? 

Andrew Horowitz:  The problem with individual investors is “when”. Oftentimes markets can move and this is not just a cliché. It’s fact. They move a lot more in a wrong direction for a period of time so if in fact you hit it right, when do you get out? And if you short the markets, when do you get back in?

I think that what you probably should be doing is something like, if you’re very concerned about the market, terminally concerned about the short-term nature of the market, you can pull some cash out. There’s nothing wrong with taking some profits and putting them on the sideline. But make sure to have some defined ways and times where you’re going to put that back to work. Don’t let some scary factor make you not do it.

In other words, stick to a plan, stick to a discipline of when you are going to do it. Maybe a dollar close to averaging plan back in. There’s no rule that someone said you have to be in the market. Nobody’s forcing anybody to be in the market.

Douglas Goldstein:  I think it’s very important. Each person has got to decide for themselves and not do something just because a newspaper says something like, “This is the allocation that everyone who’s 50 years old should have.” That’s too general.

I have discovered that people don’t really understand what risk really means.  One gentleman told me the other day, “No, I have a low-risk portfolio; we are even making a lot of money.” I said, “How is it low-risk?” He goes, “No, no, it’s low-risk, I’m making money.” I said, “Those two are not necessarily the same thing. I’m glad you are making money but a good chance is that you have a lot of risk in the portfolio.” How do you help people understand what risk really means?

The Definition of Risk

Andrew Horowitz:  When you look at risk from an investor’s standpoint, you have to measure another factor to really understand what it is. Risk could be just the risk of a lot of money or it could be the risk of not making money. It could be the risk of losing money due to inflation, but you have to put this in the perspective of time. If you look at the risk from just recently in 2007, ’08, ’09, you see that big down stroke. You are looking at it from a one-year period and you are in the midst of it and it’s pretty awful.

But on the other hand, if you look at it over a 10-year period, was there really risk?  You need to look at it as a “sleeping beauty” kind of portfolio, where you go to sleep one day and you wake up another, and who cares what happened in between?

If somebody has a shorter timeframe, maybe a five-year period until they have to retire or start taking out money, they’ll want to have a different level of risk where they’ll have few volatilities because they don’t know when they’re going to take that money out.

If somebody is maybe 20 or 30, there’s a lot more time to recoup, but you still need to look at what is their nature. One person who has a portfolio of $100,000 that is now worth $80,000 will think it’s not a big deal because they are in it for the long haul. Another person may start panicking because they lost money and they want to sell out immediately. Every person needs to be prepared differently for their level of risk.

Douglas Goldstein:   What about the baby boomers who are getting into the retirement years? How do you see the years ahead for them?

Baby Boomers and Retirement

Andrew Horowitz:  Initially, when I got into this business, it was always about, you are going to retire at 65 and drop dead at 70, 75. That was the planning mechanism.  All that has changed dramatically. People are working a lot longer and they are living until 85 or 90. The problem is that the old setup didn’t really take into consideration all those years and the amount of money you would have to have and how you would take it out.

The biggest issue is you need to set up the portfolio in a way that you understand that there is not that much of a difference between age 55 and 65. You don’t sell everything and go into bonds like the old teachings were back in the ‘70s and ‘80s. These days you need to say, “You need to have something in your portfolio for growth, for income, and an uncorrelated asset class like commodities or real estate.”

The Garden Metaphor and Investing

Andrew Horowitz: I’ll just give you one quick anecdote here or a metaphor. We look at portfolios like a flower garden. In a flower garden, if you just have roses, they’re going to look great, but eventually you’re going to have thorns and sticks and it’s not going to look pretty. On the other hand, what we like to do is put roses, impatiens, heliconias, and evergreens, which would be the equivalent of money markets or bonds for short-term bond funds.

Something is blooming at any different time of the year, so you have a garden that’s always looking full and lush. That’s how we want your portfolios to be.  

Douglas Goldstein:  That’s amazing. Andrew, we’re just about of time but you are certainly full of great ideas and great metaphors to teach people how to really think about their investing and to manage their money. How can people follow you and follow your work?  

Andrew Horowitz:  The best way is to go over to thedisciplinedinvestor.com. You could also go to iTunes or any other place to find podcasts and just look up The Disciplined Investor or my name, Andrew Horowitz. You could also listen to The DH Unplugged Show. This is with John C. Dvorak. We do this every Tuesday evening. 

Douglas Goldstein:  Okay, we’ll put a link to that at the show notes of today’s show at goldsteinongelt.com. Andrew Horowitz, thanks so much for your time.   

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