The Market Volatility Survival Tool: True Grit

Having the right investment strategy is important—really important—and surely contributes to long-term success in building wealth. But no matter how superlative your strategy, it’s your willingness to stick with it that ultimately will help you meet your financial goals.

As in so many cases, what is true in investing is also true in life (although it’s likely more accurate to reverse the order of that statement). Following that logic brings to mind a recent University of Pennsylvania study. It challenged the conventional wisdom that innate intelligence and talent are the two primary predictors of personal success. In this case, personal success is defined as, if in a somewhat limited manner, objective “vocational and avocational achievements that are recognized by other people.”

The study’s authors, Angela Duckworth and Christopher Peterson, explored the role of other traits that also contribute to an individual’s success, such as creativity, vigor, emotional intelligence, charisma, self-confidence, emotional stability and physical attractiveness, among others. They found that a single trait has proven to be as much, or more, of a determinant for success even than intelligence and talent. It’s the old standby:

GRIT.

Consider this description of grit, which appears quite frequently in academic and motivational literature:

Grit entails working strenuously toward challenges, maintaining effort and interest over years despite failure, adversity and plateaus in progress. The gritty individual approaches achievement as a marathon; his or her advantage is stamina. Whereas disappointment or boredom signals to others that it is time to change trajectory and cut losses, the gritty individual stays the course.

Please re-read that explanation again, and be honest. How would you rate yourself?

Or, better yet, take the University of Pennsylvania’s very short online quiz, which will give you a grit score and relative ranking within the study’s findings. (Let me know your score via Twitter; I got a 4.5.)

Here’s the great news:

While there is little you can do to boost your innate intelligence or talent, you absolutely can train yourself to make the most of your inherent gifts by increasing your grit score. Sure, some of us are more prone to grit than others, but through education, re-education, scientifically proven habit formation and accountability, all of us are capable of boosting our level of grit.

How, then, can you increase your IGS (Investment Grit Score)?

1) Ensure that you have an investment strategy. Before you can stick to a strategy, obviously you need to have one. If your holdings are closer to a random collection of stocks, mutual funds and multiple investment styles than a single, cohesive strategy, your next step(s) should involve rectifying that situation. I strongly recommend an evidence-based, proactive approach over the more traditional crystal ball, reactive method.

2) Know your strategy. You’ll never stick with your strategy when the going gets rough if you don’t understand it. And I mean really understand it—well enough to explain it to a fifth grader. Know that volatility and down cycles in the market aren’t just common, they’re necessary. If investing in the market didn’t involve risk and require intestinal fortitude, financial theory tells us returns would be limited. Stocks pay us a premium only because they can, and do, go down.

My colleague, Larry Swedroe, is the author of numerous books, including Think, Act, and Invest Like Warren Buffett. He suggests we must actually embrace even severe bear markets. Come again? “If we didn’t have bear markets from time to time, valuations would be persistently higher. As a result, stock returns would have been persistently lower than they’ve actually been,” says Swedroe.

3) Stick to the strategy through the formation of good habits. It’s not natural to embrace portfolio declines, even if it is a necessary part of the process. Therefore, we need to establish the appropriate habits, discarding those that invite long-term losing (like active trading and abandoning your strategy) for those that facilitate long-term winning. But what are winning habits and how do we establish them?

The foremost winning habit in evidence-based investing is rebalancing, the process in which proceeds from the asset classes that have gained are shifted to those that have declined. Rebalancing forces you to buy low and sell high, the fundamental aim of any investment. Charles Duhigg, in his book, The Power of Habit, teaches us exactly how to replace bad habits with good ones: “To change a habit,” like bailing on an investment strategy when a headline or its recent performance scares you, “you must keep the old cue,” such as fear, “and deliver the old reward,” like some kind of action, “but insert a new routine.” Rebalancing is the new routine.

I want you to notice that I’m not encouraging the verb form of the word “grit” here. If you have to grit your teeth and bear the inevitable volatility of your portfolio in the form of dental bills and sleepless nights, it’s likely that you should construct a more conservative portfolio in the first place.

And whether it’s found in life or investing, don’t feel as though grit is purely a solo venture. Accountability—and having someone coach or guide you, like a mentor, personal trainer or financial advisor—is the key to success for many. Myself included.

A version of this commentary originally appeared on Forbes.com

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