Overview – We Are All Creatures of Habit
Perhaps you’ve heard it said before that we are creatures of habit. Indeed, this simple statement is, for the most part, true. So much of what we do daily is not a product of conscious choice, but rather due to certain habits we have come to develop.
Brushing your teeth first thing in the morning, going for a morning run, grabbing an afternoon coffee, checking your phone every few minutes: these are all actions many people perform throughout the day without giving them much, if any, deeper thought.
When trying to achieve success in a given endeavour, one of the first things we’re advised to work on is to develop good habits. The benefits (or consequences) of small, seemingly trivial actions that we automatically perform add up over time, so it would be best to ensure that these small actions will ultimately benefit us over the long term.
Naturally, investors have their habits too.
Although many of the things investors decide to do are a result of conscious thought, there are just as many actions they perform out of habit. If the benefits, or consequences, of habits add up over time, then investors better make sure that the investment habits they have are beneficial.
What Exactly is a Habit?
Before talking in-depth about investment habits, let’s first take the time to understand what exactly a habit is.
In Charles Duhigg’s The Power of Habit, he explains that a habit can be thought of as a loop, containing three elements: a cue, routine, and reward.
A habit is simply an action we perform to satisfy a desire, which is triggered by some sort of prompt (i.e., a cue).
Let’s go over an example:
Say it’s the middle of the afternoon and you start to feel a bit drowsy. Not wanting to take a nap because you still need to work (or, more likely, because you can’t nap at work), you automatically get up and make some coffee. After having the coffee, your drowsiness subsides, and can now resume your work.
In this situation, the cue, routine, and reward are as follows:
- Cue: the feeling of drowsiness
- Routine: drinking coffee
- Reward: feeling more alert/awake
Can Habits Be Changed?
Let’s say this habit of drinking coffee in the afternoon starts to become detrimental.
In an attempt to stave off afternoon drowsiness, you start to brew coffee with greater caffeine content, you drink multiple cups, or you may opt to purchase coffee instead of making your own. A lot of caffeine and excessive coffee spending is never good, so how can you change this habit?
A common belief many people have is that once a habit has been formed, it’s virtually impossible to break it. However, this isn’t entirely true.
Duhigg explains that to change a habit, the cue and reward can remain untouched because they are so difficult to remove entirely, though they can, just not right away.
Instead, people should focus on changing the routine. The rewards that people seek and the triggers that prompt action are unchanged, but the in-between step is relatively easier to substitute.
On paper, changing a habit seems like a very easy thing to do, trivial even. In practice, it’s usually much easier said than done. That’s because every time a habit is performed, it becomes further ingrained in our minds, making it that much harder to modify.
A habit that has been performed countless times over a long period can’t simply be changed at a moment’s notice. Instead, changing a habit is usually a gradual process, whereby small, consistent steps will eventually lead to the desired change.
Back to our afternoon coffee example, perhaps you start by limiting the coffee you drink to just one cup instead of several. Eventually, you substitute your coffee with herbal tea, which is eventually substituted with glasses of water. Perhaps you choose to introduce some physical activity, such as a stretching routine or a brisk walk, to further invigorate yourself.
So, the cue of afternoon drowsiness and the reward of gaining additional energy is still retained, but given enough time and consistent action, the routine can ultimately be changed, thereby changing the entire habit loop in the process.
Why Should Investors Care About the Habits They Have?
Our discussion of habits, habit loops, and changing routines may lead to the question “What do habits have to do with being an investor, and why should they care about them?”
Lots of emphasis is placed on the major, conscious actions that investors take such as making investment decisions, performing analysis, and coming up with strategies; rightfully so, since these have major impacts on an investor’s portfolio.
While emphasizing these major actions is important, the argument could be made that not enough attention is being given to the small actions that investors perform without so much as a second thought, or in other words, their habits.
In the introduction, we mentioned how the benefits, or consequences, of habits add up over time. This is especially important for investors to keep in mind because a major contributor to their future success, or demise, is the culmination of all the small, automatic things they do regularly.
By ensuring good investment habits are formed, not only can investors improve their chances of achieving future success, but they also steer themselves clear of potential pitfalls that, by the time they realize they’re caught in them, are already too late to act.
Investment Habits Throughout an Investor’s Career
If habits play such an integral role in an investor’s career, what sort of habits should they try to have?
There are all sorts of habits that investors can form, but the objective is to ensure that they will ultimately benefit them. Even with this goal in mind, this doesn’t narrow things down much because there are just as many habits that fit this description.
Rather than trying to come up with a list of all possible investment habits, we will instead focus on the sorts of habits investors may want to have at certain stages of their careers, whether they’re just about to start investing or already have several years of experience.
While some habits can certainly be carried throughout an investor’s career, some may only be effective at certain stages of it.
Naturally, investors are free to decide what sort of habits they want to have but to help with generating ideas, we will go over some examples.
Some Investment Habits to Form Before Starting to Invest
Make Saving Money Second Nature
Many people have aspirations of putting their money to work, yet struggle to start because they don’t have enough money on hand to begin. If somebody is serious about becoming an investor, then they must first set aside enough funds to allow them to do that.
When somebody receives money and the first thing that crosses their mind is “How do I spend all of this?”, then it will be very difficult, if not impossible, to have sufficient funds for investment purposes.
Saving precedes investing. The more investment capital you have to work with, the more effective investing will be at growing your money.
So, when receiving money, future investors will want to develop the habit of setting aside a portion of these funds before spending anything. That way, they can slowly but surely build up enough investment capital without giving it much thought.
When Making a Decision, Take a Step Back and Assess the Relevant Information
So many people fall victim to making impulsive decisions.
Many times these impulse decisions are made for relatively small matters, such as buying a chocolate bar at the grocery checkout or deciding to get some fast food on your drive home. There are also times when big decisions are made at a moment’s notice, such as a weekend getaway flight.
When it comes to investing, making impulse decisions can have some very serious, lasting consequences.
Impulsively buying a stock simply because others have spoken highly of it, or deciding to sell off all your shares of a certain holding because of some rumours, will be very difficult to recover from.
If an individual has aspirations of investing, then a habit they may want to form is to always give some thought to their decisions before making them.
Now, this doesn’t mean every decision needs to be made after hours of deliberation; the point here is to make individuals stop and reflect on what it is they’re deciding to do. By doing so, they minimize the chances of doing something that may not be beneficial to them, or worse, have lasting damage.
Some Investment Habits to Form as an Active Investor
Don’t Take Everything at Face Value
Countless investors have made rash decisions because they came across a source of information containing some troubling news, felt that there was no need to investigate further, and decided to act quickly before it was “too late”.
Time and time again investors fall victim to overly provocative news headlines or panicked commentators because they take these things at face value, that is, they assume these things to be completely true and faultless.
Beyond the large text and loud voices is almost always more information waiting to be uncovered, information that will provide much-needed context for investors. Developing the habit of looking for another point of view can help provide that.
It never hurts to practice a bit of healthy skepticism, and developing a habit of seeking the full picture will certainly be of great benefit to investors both new and experienced.
When Emotions Flare Up, Have a Routine to Cool Them Down
The relationship between investing and emotions has been brought up many times in the past. We’ve even discussed this topic in articles before, namely here and here.
Even the most emotionally disciplined investors will have moments where their emotions are starting to get the best of them. So, before things go from bad to worse, investors need to have a habit (or habits) in place to calm them down.
Naturally, different investors handle their emotions in all sorts of ways, so the routines they choose to follow will vary significantly. Regardless of how investors choose to reel in their emotions, they must have an automatic response to follow.
The faster an investor can return to a state of rational thinking, the lower the chances that they will make bad, emotionally driven decisions.
Now, a habit (or some habits) alone may not necessarily be enough to calm emotions right away, but they certainly play an integral role in doing so.
Change Bad Investment Habits Before It’s Too Late
Earlier, we discussed how habits could be changed, and the way to do that is by substituting the detrimental routine with a more beneficial alternative. While this sounds easy, we also talked about how this is much easier said than done.
Forming good investment habits is important, but the opposite is just as crucial, which is to change bad habits as soon as possible.
The longer a bad investment habit persists, the higher the likelihood that it will lead investors down a detrimental path, and who knows how long it will take to get back on track should investors find themselves in such a situation.
Wrapping Up
Contrary to popular belief, not everything an investor does is due to logical, conscious thought. Many of the actions they take are also due to certain habits that they have.
While plenty of attention is given to thought-out actions such as performing investment analysis and coming up with strategies, it’s easy to neglect investment habits as something that’s of minimal concern.
However, habits are very powerful, yet this power cuts both ways: they have the potential to bring people and institutions to unimaginable heights, or depths they can never hope to recover from.
With this in mind, it’s in an investor’s best interest to ensure they have good investment habits, and to get rid of any bad habits as quickly as possible.
