Warren Buffett’s mentor Benjamin Graham famously said, “The investor’s chief problem and even his worst enemy is likely to be himself.”

Graham sure knew his subject. Consider: The 30-year annualized return for the S&P 500 average was +10.35% through 2015, but the average investor in the U.S. market pocketed just +3.66%, according to an analysis of investors by researcher Dalbar Inc.

How can you avoid leaving money on the table? The answer is to change your investing behavior so that you stick to a plan rather than act out of fear or greed. Most of the shortfall cited in the Dalbar study, in fact, was due to “panic selling, excessively exuberant buying, and attempts at market timing.”

  • In every market, you control what matters most. The highs and lows of the market may be out of your hands, but how you choose to behave is within your power, and is an important driver of returns.
  • Diversification means always having to say you’re sorry. Diversification is not a panacea, nor does it prevent your portfolio from falling, even dramatically, at times. What it does is protect you from idiosyncratic risk and losing your shirt on a concentrated bet. Buying a car with an airbag is a good idea, even if you never get in a wreck. Diversifying your portfolio is similarly wise, even if the benefits may not always be apparent.
  • If it’s exciting, it’s probably a bad idea. Nobel laureate Paul Samuelson said it best, “Investing should be more like watching paint dry or watching grass grow.” Emotion makes us a stranger to our rules, and straying from a discipline tends to end in disaster.

—Daniel Crosby, Founder of Nocturne Capital and author of The Laws of Wealth: Psychology and the Secret to Investing Success. Read more.