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Discipline Is the Most Important Attribute for Investors

NEW YORK (TheStreet) -- A few days ago I looked at the difference between skill and luck in investing and the extent to which discipline bridges that gap.

The conversation then evolved on my blog into the difference between risk and volatility and then -- in response to an article in The Wall Street Journal -- whether investors should invest money set aside for emergencies.

When people refer to emergency cash, they typically mean a sum of money that can pay three to six months of living expenses.

My response is that such funds, which could be needed immediately, should not be exposed to investments that can go down meaningfully in price and possibly take a long time to recover.

Today I'd like to return to the idea of disciplined investing. Investing discipline is often equated only with avoiding panic selling.

We all know that every so often the market goes down a lot and eventually comes back and goes on to new highs. But many investors forget this at the most crucial time: after a large decline but before the market recovers.

The reason for panic is many people have what seems like an instinctive fear of being wiped out financially and becoming homeless, penniless and hungry.

In a comment on my blog, one reader referred to this as "delusions of squalor." That kind of fear causes investors to abandon the very discipline that just a short while earlier they knew was the best thing for them.

There's another element to investing discipline: Sticking to one's strategy during a huge rally.

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