How to achieve the best returns with time, patience and discipline

Most things worth having in life often don’t come easy. With investing, it’s no different.

Because markets are largely efficient, investing is the rare pursuit where simply being smarter or working harder than the next person does not necessarily translate into better performance. This counterintuitive fact has derailed many successful professionals.

If you want the returns that the best investors get, you have to earn them through the right behaviour and mindset.

As Mark Twain wrote in Following the Equator: “We should be careful to get out of an experience only the wisdom that is in it – and stop there; lest we be like the cat that sits down on a hot stove-lid. She will never sit down on a hot stove-lid again – and that is well; but also she will never sit down on a cold one any more.”

In the same way, investors often avoid the stock market entirely because they got burnt once. But the stock market is more like a cold stove – strange at first but safe if given the chance.

Like we do every few years, we once again find ourselves in a period of heightened uncertainty.

With multiple wars on the go, volatility in interest rates and an imminent international election cycle, we have all the ingredients for the most common investing mistakes. But how is the mature investor to proceed in such an environment? Let’s unpack the mistakes before we explore a better approach.

The behaviour gap

It’s a sad reality that most people get investing wrong. They chase winning funds, buying high and selling low. They tinker and react instead of sticking to a plan.

All successful investing is goal-focused and driven by planning. All failed investing is market-focused and current outlook-driven. Successful investors act continuously on their plan. Failed investors continually react to the markets and always in the wrong way.

According to data, the average investor’s returns are much lower than the returns of the funds they are invested in! This is a frightening fact and one that should scare any serious investor.

It's not that these investors set out on a mission to fail. However, due to the human condition, all investors can be tempted into making irrational, emotion-driven decisions during times of uncertainty.

It’s only in the past few decades that the field of behavioural science has shed more light on the cognitive processes we fall into when we are stressed. The shortcuts we have developed through centuries of survival have not prepared us well for the modern financial system.

However, through a mature awareness of how we operate, we can overcome this obstacle like all the other obstacles in our past. While it may not happen in our lifetime, the behaviours we aim towards may become more instinctual over time.

The blueprint for success

While the wrong behaviour may be ingrained in us, the correct behaviours have been modelled for us by many great investors. A study of history also hints at the mindsets that will best suit us as we embrace an uncertain future. These mindsets may be simple, but they will be challenging to cling to.

The first mindset we’re aiming for is a long-term perspective. This provides perspective about what it is that you’re trying to achieve on your investing journey and why it is that you’re trying to build wealth. By also having an understanding of history, we become rational optimists over time.

The second mindset we desire is to become accepting of short-term disappointment.

Setbacks are inevitable and in investment markets, this shows up as market volatility – times during which asset values decrease in price.

Finally, we aim for the ability to be patient. Great results come to those willing to wait to see the fruits of their labour.

These mindsets play out differently but we know how great investors implement them. They typically invest in a globally diversified portfolio with low fees and contribute to them regularly with discipline and patience. This portfolio is “perfect” on day one but the results will come only when mixed with a long-term perspective and patience.

While the portfolio is “perfect”, the investor knows that temporary declines will occur regularly. When it comes, they don’t change their strategy. They don’t react to short-term events. They welcome them as the price they have to pay for superior long-term returns.

We follow this blueprint ourselves and it’s the one we desire for our clients. There’s no guarantee about the future but we are confident that those who remain steadfast during times of uncertainty will reap the rewards in the long term.

If you’re growing wary of uncertain times, discuss your concerns with a sage professional. It’s in these times that our future success is shaped.

Sam Instone is co-chief executive of wealth management company AES

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