What losing weight and successful investing have in common

Successful investing requires making sacrifices. It means, for example, putting money away for the future instead of spending it now. But the biggest sacrifice is accepting that there will inevitably be periods of discomfort, and having to be sufficiently self-disciplined to resist the temptation to give up. That's where a good financial adviser can really come into their own.

As anyone who has managed to do it will tell you, losing weight requires making sacrifices. The two main ones are eating healthily and doing more exercise. Of course, it’s not easy giving up your favourite foods or going for a run on a cold winter’s morning, but the good news is that if you consistently burn more calories than you consume for long enough you will almost certainly succeed.

It’s the same with investing. The overwhelming evidence is that, to achieve our investment goals, we have to take risk. We can’t just stash away money under the bed or in a savings account. We have to invest it in the financial markets, particularly the global equity markets, and there are going to be times when taking that risk is hard. Like lifting heavy weights or cycling that extra mile on an exercise bike, it can certainly feel uncomfortable, but, in the long run, it’s a sacrifice that’s well worth making.

Another similarity between investing and losing weight is that a large part of the battle is psychological. All too often we tell ourselves the sacrifices are just too great. After all, risk is a scary word. No one likes to think of putting their hard-earned money in jeopardy. But if you take the trouble to understand what risk in this context actually means, you’ll realise it’s not as daunting as you might have thought.

Putting risk in perspective

Let me explain. When we talk about risk in relation to investing, we’re not referring to the danger of a permanent loss of capital, or losing all your money. If you buy, say, just one stock, or one type of cryptocurrency, there is a very real risk of losing your entire stake. But, if you invest in a broadly diversified portfolio, it’s extremely unlikely that all of your money will be wiped out.

Just think, for example, of the two major stock market crashes we’ve seen so far this century. In 2008, a collapse in the U.S. housing market and the failure of major financial institutions led to a global market meltdown. The S&P 500 index of US stocks fell by approximately 38.5 percent that year, and the FTSE 100 by 31.3 percent. But markets recovered within three years and went on a long bull run.

Then, in 2020, the onset of the COVID-19 pandemic again sent markets into a downward spiral. In March 2020, the S&P 500 saw its fastest ever drop into bear market territory, taking just 22 days for the market to fall by 20 percent. The FTSE fell almost 11 percent in a single day of trading. The VIX volatility index, which measures market risk and investor sentiment, peaked at around 82, compared to its historical average of around 20. But again, markets recovered, only this time it happened far more quickly: the S&P 500, for instance, surpassed its pre-pandemic high in less than five months.

Capitalism is very resilient

But these aren’t isolated examples of market recoveries. Indeed capitalism has proved remarkably resilient over time. There’ve been numerous events over the last century or so which have sent the markets into a tailspin, and yet, on each occasion, stock prices always recovered and eventually reached new heights.

So when we talk about risk, what we’re actually referring to is market volatility. More specifically, we’re referring to the possibility that market volatility will mean you can’t access the money you need at the time you need it, or that it will cause you to take fright and abandon your chosen strategy.