Temperance & Your Portfolio
How one of Ben Franklin's 13 virtues can guide your portfolio management during financial turmoil.
Unfortunately, economic news and markets for 2022 have continued to be at best—gloomy, at worst, foretelling of a protracted downturn. I repeatedly remind investors to “stay the course"—which is an easy sentiment when markets are regularly achieving record highs, but in less favorable markets that advice may seem less than satisfactory. When it comes to investment management, sometimes people think “something should be done” when so much hoopla is happening in the news.
As with any virtue, temperance is easy to exercise when unchallenged. Just think about the last time you were hungry or tired. When your daily routine is derailed by lack of sleep or delayed meals, your best intentions of eating healthy or remaining patient can collapse. Managing investments is the same; easy to stay the course and exercise control when markets are advancing, much harder when markets experience unplanned events or move into correction territory.
Temperance is another way of saying “stay the course” but exploring the four facets of temperance can remind investors of its key role in stopping you from making poor investment decisions during market upheaval.
Most understand the physical application of temperance, associating it with avoiding overeating or imbibing. It is an external restraint in behavior accomplished by the act of doing or not doing. In market downturns it is most likely the physical act of NOT DOING that is most important.
Many investors have already exercised temperance when building their portfolios. When savers regularly put aside a portion of their income to invest, they are forgoing an immediate satisfaction of spending that money for a planned future of utilizing it for a greater purchase or financial goal.
Investors further practice temperance when picking where to invest their portfolios—balancing between saving very conservatively or aggressively depending on their risk profile and timeline until monies are needed.
When it comes to market cycles and negative market news, physical temperance urges us to avoid making changes to our portfolios based on whims.
Don’t make unplanned changes to your portfolio. Remain temperate in your investment choices by creating a portfolio for the long-term and not reacting or making changes based on short term notions.
Emotional financial temperance—avoiding being carried away with passions, requires moderating the use of one’s monies and financial choices.
Emotions will entice you to engage in behaviors and choices that you may not indulge otherwise. In the world of investing, consuming too much negative news coverage will certainly lead to a negative perspective, particularly in down market cycles. While it’s helpful to understand the broad strokes of the markets, minute-by-minute coverage often generates emotional upheaval. Do not indulge to a point of upsetting or outraging your senses.
Practicing emotional financial temperance demands you to avoid news and information that will only create negative emotions making it seem necessary to “react” in a way that potentially leads to making investment decisions you would not have made in a calm environment.
Many investors suffer from overthinking their portfolio when markets become challenging. There are two ways that signal a lack of intellectual temperance in investing:
Investors who begin “finding” better asset classes for the short term and reallocate based on a whim. Investors often engage in this to try to hedge their losses if a market correction occurs. Rebalancing, as with anything, can be a financially strategic decision when implemented on a regularly planned basis. But rearranging your portfolio last minute into asset classes you did not initially place in the allocation is simply attempting to time the market (a failing strategy).
The second signal of failing intellectual temperance—when an investor begins dwelling on things. Mulling over things one cannot control, obsessing about historical financial returns and future market events, will not be a fruitful means of evaluating your long-term investment strategy.
Do not overthink market downturns. Spending your mental energy attempting to outsmart a marketplace full of trillions of transactions a day will not help you create better outcomes for you portfolio. Build a portfolio for the long-term, understanding that long-term investing will expose you to all market cycles.
Just as with any other spiritual practice, if we spend too much time wrapped up in spiritual pursuits we neglect other aspects of our lives and can let them fall into disrepair. Spiritual financial temperance is vital to maintaining the boundaries on your time that your investment activity should require on your daily life.
Some investors’ market strategies and engagement can take on a religious-like aura. They watch the ticker obsessively, keep track of various market indicators professing these indicators provide clarity as to where markets are heading. You know these people—they are the friends and colleagues day trading their 401(k)s and recommending the latest active investment strategy book or blog.
Oftentimes their faith in their strategy compels them to spend a lot of time and energy in implementation and monitoring. Investing does not require this level of dedication and energy.
Investing is not a religion and does not require doctrinal adherence or sacraments. Instead, successful investors are able to build portfolios based on their goals, buy and hold as they desire to allocate and revisit routinely, and never to make substantial changes (unless the purposes of the money changes).
Successful Financial Outcomes
Implementing temperance to your portfolio management is not hard during the good times, but certainly can be challenging during market upheaval. Unfortunately, this next period in the market may be one of those times when remaining temperate may be challenging.
Continue implementing your financial plan through saving and investing. Remember, financial plans take into account all market cycles in their projections and the impact they will have on your investments. What they do not take into account is last minute changes that are based on short-term information and emotions.