By : Phillip Washington
Without a doubt, emotional intelligence.
It’s not very difficult to engineer a portfolio to target above average returns. Higher returns (all things being equal) are a function of higher volatility (The up and down movements).
The further apart the up and down movements are over a selected period of time, the higher the potential return.
For example, a saving account’s value doesn’t move at all. A stock portfolio goes up and down daily.
So it’s no surprise that over time a stock account on average earns more than a savings account.
If you want to shoot for above average stock returns, one simple way is to add leverage (borrowing money, using options, or using futures) to increase volatility, but this is a topic for another discussion.
Let me get back on track.
Emotional intelligence is the most important skill in investing. The simple part is finding an investment strategy that will get you the returns you desire.
The hard part is sticking with that strategy through the volatility. It sounds easy, but it’s not because our brains aren’t wired to handle uncertainty well (uncertainty and volatility are similar).
Here’s an example I like to use to illustrate this point.
Assume you decide to go into a 100% commission sales job (unlimited upside potential, but no safety net).
Also, assume you’re able to completely eliminate your fear of getting told no (which is not possible, but just rock with me for a second).
You also have five years of lifestyle expenses in the bank so you don’t have to worry about running out money while you build up your client base.
Without needing money in the short term and having no fear of being told no, I don’t know anyone who wouldn’t be making at least $1,000,000 a year in five years.
The big reason people don’t make it in sales (or business) is their emotional fear of being told no and not having enough in reserves to weather the time it takes to build a client base.
Making big money in investing is almost the same, with the difference being that most of us don’t need the money from our investment portfolio for a very long time. All we have to deal with is our emotions (Assuming you or your team built the portfolio properly and you’re well diversified).
Fear destroys investor returns.
I’m not saying it’s easy to watch your money go up and down and not feel fear. As a matter of fact, the fear will never go away and will probably get more intense because the numbers get bigger over time.
Just like the top sales professionals I know hire coaches to keep them pushing through their fears and negative emotions, the best investors I know have trusted advisors and/or teams to help them keep their emotions in check.
We are human and emotions are our gift and curse. If you can learn to embrace this truth and put a good team and system in place to remove emotions from the investing process, you will very likely be an above average investor.