If I asked you “What is the most important organ in investing?” what would you say? The brain? According to the famed investor, mutual fund manager, author and philanthropist, Peter Lynch, who ran Fidelity’s Magellan Fund (which had an average 29.2% annual return from 1977 to 1990): “In the stock market, the most important organ is the stomach. It’s not the brain.“
When you think about investing you probably think about how much you can invest, what the return will be, the products and geographic area you can invest in.
But do you ever ask yourself whether you have the stomach for investing?
The Emotional Roller Coaster
When investing in the stock market there are two sure things, it goes up and it goes down. Do you have the stomach to cope with these fluctuations in the market?
Can you control your emotions so that you don’t make decisions based on:
- fear when the stock market plummets or
- over-exuberance when the stock market soars?
It’s important to be able to detach yourself from your emotions when investing so that you make decisions based on rationale and logic rather than emotions.
Know Your Risk Appetite
What is your appetite for risk? You may tell yourself that you’d be fine if you lost 10% of your portfolio if there was a correction in the market. You could stomach it.
However, then the stockmarket plumments by 8%.
Your stomach drops, you start to panic, you can’t sleep and then you realise your risk appetite is way lower than you thought!
Your risk appetite will also help determine what assets you invest in e.g. bonds are deemed less risky than equities.
What Is Your Investing Time Horizon?
When investing, you should be doing so for the long term.
However, if you are a year or two away from retirement, near-term market corrections matter as they affect the value of the pension pot you will be withdrawing from.
If you are younger and decades away from retirement it matters less as you will have the time to ride out the bumps in the road along the way.
The chart below shows the S&P 500 over decades. Even the Great Recession (2007 to 2009) is only a small dip on the chart as the stock market recovered and moved higher over time.
Sleeping Soundly
If you are going to invest in something that will make you feel sick to the pit of your stomach with anxiety and cause you sleepless nights, then don’t do it.
Diversification
Different asset classes have different levels of risk associated with them. For example, bonds would be deemed less risky than shares.
Diversification is like an antacid for your investing stomach. As one asset class decreases another may increase. Diversification may help reduce the stomach-churning impact of market volatility on your investments.
Educate Yourself
It’s important to educate yourself on investing and do due diligence on what you plan to invest in. You need to understand the investment.
So many people lose money because they don’t understand the product they are investing in, they don’t understand its risks etc.
The more you know and understand about investing the less stomach churning it becomes.
Patience and Discipline
When investing you need to develop patience, discipline, and resilience.
You need to control your impulses, not panic and sell all your investments in a downturn.
You need to hold your nerve and stick to your investing plan even when the market throws its toys out of the proverbial pram in a massive tantrum.
Financial Goals and Your Investment Stomach
You need to define your financial goals, what is your ‘why’ for investing?
Are you investing for a downpayment for a house, your retirement or your child’s education?
A strong ‘why’ can help calm your investing stomach as you weather the inevitable investment storms.
Use a Financial Advisor
If you are not comfortable managing your own money, then you may be better off seeking the advice of a financial advisor. You need to pay a fee for this service, usually a percentage of assets under management (AUM).
Your financial advisor can help you choose investments that suit your investing time horizon, your risk appetite and investing ethics (e.g. investing in ESG products).
Some financial advisors claim they act as psychologists for their clients, counselling them on their investments when the market tumbles and talking them out of panic selling everything and moving to cash only.
In Summary
Peter Lynch, the famed investor, mutual fund manager, author, and philanthropist, has emphasized that in the stock market, the most important organ for successful investing is the stomach, not the brain.
He said there’s always something to worry about. We’re all getting bombarded with news every day.
You need to develop patience, resilience and have the stomach to deal with inevitable market fluctuations and not panic sell when the market corrects.
Thanks for reading!
DISCLAIMER: Inquisitive Finance operates on principles of exchange of knowledge, ideas and opinions and learning in the community. Your decisions are entirely your own responsibility, and I am in no way responsible for your actions. I am not a financial advisor. Whilst I strive to provide accurate and up-to-date information, I make no warranties or representations as to the accuracy or completeness of this information. Use common sense, do due diligence and where necessary, use the services of a licensed financial advisor, before making any financial decision and/or transaction.
