Stay Committed, Be Rewarded
The stock market is a device for transferring money from the impatient to the patient
— Warren Buffett
We have been taught that the secret to success for most things in life is persistence and perseverance. If you fail, try, and try again. But somehow, many still fail to stick to a proper fitness or diet plan despite knowing that doing so will improve their health. A similar disconnect happens when it comes to sticking to a proper investment plan.
For years, the Ministry of Health (MOH) has advocated for a myriad of health programmes for Singaporeans, all in an effort to encourage eating healthily and exercising regularly. It is likely that policy makers have data and statistics on the types of diseases and the causes of death that affect the nation. Currently, MOH has declared a “war on diabetes”, pushing for less sugar in the diets of Singaporeans.
Although we acknowledge the beneficial effects such practices have on our health, many of us tend to slack off and drop out of the routine altogether. After all, sticking to a regime of exercise and healthy eating takes effort. This is why the fitness and diet industry is worth billions of dollars. We either want to switch to the latest trend - like the keto diet or intermittent fasting - or look to a paid fitness trainer to give us a kick in the rear for motivation.
A recent study on the U.S. Weight Loss and Diet Control market showed that it is now worth approximately US$72bn dollars. Closer to home, Statista estimates that the app and wearable market for Singapore this year would likely reach around US$30M and will continue to rise in the future, as projected in the chart below.
So why do we pay so much for someone to tell us something, that deep down we already know should be done? If we could reframe the problem, it may provide us with the proper incentive to stay committed.
Data from the World Health Organisation (WHO) indicates that global obesity has reached epidemic proportions, with 2.8million people dying because of it every year. In Singapore, MOH data shows that 10% of our population are obese - approximately 250,000 people. If you take the principal cause of death as heart disease, without even counting related diseases like diabetes or cancer, obesity causes over 6,000 deaths in Singapore every year. Perhaps with this in mind, we will stick to our health and fitness regimes.
A parallel can be drawn with investments, as many of us don’t do very well when it comes to sticking to our investment plans. We all know the theory and academic research behind it - don’t trade too much, don’t try to predict what will happen in the market, and invest for some future goal or vision. However, when market dislocations occur, or are about to occur (e.g. the March 2020 COVID-19 induced sell-off, the US presidential elections, or an impending trade-war, etc.) we feel compelled to readjust our investments. Our brain has a hard time differentiating actual risks from perceived risks. Short-term fears very often disrupt well-intentioned long term plans which you have painstakingly created and discussed with your advisor.
Maybe quantifying what happens if we prematurely react to the perceived risks of global events could allow us to make better decisions. The diagram below shows the significant difference of returns in your investments if you had decided to exit equities out of fear, and instead, chose to hold cash. Just a day out of the market equated to a difference of over 10% in returns over the long run. Deviating from your investment plans comes with consequences.
As for the concern that some crises could destroy the value of your money and investments, the chart below shows that this is simply not the case. A dollar invested over the long term - through many different global events - would have yielded a return of over 60 times. Whilst this year may feel tumultuous and scary in the present, these events will be but a small drop in the overall scheme of things ten years into the future.
The takeaway is that while risks obviously exist, both in the markets and other aspects of life, always remember, it would do you a world of good to remind yourself why you have decided to commit to a plan in the first place, and be disciplined enough to stick with it. With the help of a trusted advisor, you can make much better financial decisions that will benefit you in the long run.
