Keep Riding Your Bicycle
Life is like riding a bicycle. To keep your balance, you must keep moving.
— Albert Einstein
Do you remember when you learned to ride a bicycle? It may be too long ago for some of you but perhaps you can look at how your children or grandchildren are faring now. Regardless of whether they used training wheels or a new-age Strider bike, hopefully a new skill was learnt eventually.
Small Repeatable Habits
As Einstein said, when on a bicycle, you have to keep moving on, otherwise you will fall down. One fundamental concept in cycling is the role of angular momentum in maintaining balance. Staying upright with the wheels rotating at a steady pace is much easier and enjoyable than frequent starts and stops.
Discipline in a financial plan is not dissimilar. Whether it is committing to your monthly regular savings plan, maintaining a budget, or just sticking with an asset allocation, the ability to reach your destination can be positively impacted by building small, repeatable habits.
Traffic on the road or an upcoming bend could instinctively make us want to slow down drastically when a lot of times we are likely better off maintaining our current momentum. In investing, a headline about some economic data signalling poor performance, market crisis, or talk about market overvaluation could similarly incline us to pause. Often, we feel like selling all our positions, hoping to seek shelter in the perceived safety of cash or bonds. However history has shown repeatedly that time in the market is one of the best tools investors have at their disposal in generating wealth.
The diagram below shows two individuals and their annual contributions. One started at the age of 19 and contributed for 8 years. The other started at 27 years old and contributed for 39 years. The person who started at 19 reached $1M faster and with less capital than their counterpart. A 10% long term annualised return in stocks is possible as long as you are broadly diversified in a systematic indexed manner.
Keep it Simple
The Strider bike we mentioned earlier was linked to several studies published in Apr 2021 in the journal Nature. The studies showed when asked to change or improve something, people tended to overlook the option to subtract parts — in essence they felt that they needed to add more or “make it more complicated” in order to improve it. The Strider bike was created in the the exact opposite way; after conducting a series of experiments, the founder, Ryan McFarland, found that children would learn better not on contraptions that were like bikes with added parts — namely, extra wheels for stability — but on ones with fewer parts.
This insight was rather eye opening because balance is a key element of learning to ride. You must gain confidence in maintaining balance and overcome the fear of falling. In a way, tricycles and training wheels remove this aspect from the equation.
In the same way, investing in a simple manner usually yields far better results than complex investments. Going by academically proven principles such as diversification , exposure to simple drivers of returns, and keeping an eye out for risk will help you in your long-term investment journey. There is really no need to dabble in options, futures, cryptocurrencies, leverage, junk bonds, and whatever the latest investment fad is. Far too many people do not understand investing, and exposure to even more complex products would make it worse, not better.
Preparing for A Worst Case Scenario
We wear a helmet while riding a bike in case we fall and hit our head. We may not expect to fall down often if at all, but the preparation helps us to stave off a potential trip to the A&E. In the same way, by understanding the range of potential outcomes for our asset allocation we can reduce the chances of panicking. So that when a market downturn comes again, we know exactly what to expect and what steps we should take in order to get back to level ground.
Wrap Up
For some people, the ability to ride a bike came naturally, but for others, learning the skill may have required assistance. The same may be said for the ability to be a disciplined investor. It could come easily for a few people, but many struggle with the concept. In these cases, seeking assistance from a professional fiduciary advisor is worthwhile. In both aspects, keeping things simple, understanding the potential risks along the way, and communicating effectively about dealing with them will lead to a more enjoyable and fruitful journey.
