PATIENCE, n. A quality apparent among such lower life forms as snails and tortoises but rarely among humans who invest in financial assets. [Jason Zweig, The Devil’s Financial Dictionary]
When we discuss the importance of disciplined investing with our clients, we tend to emphasize how critical it is to stay invested in the midst of a down market and not panic out. And when markets are climbing to new highs, we encourage clients to ignore the temptation to seek higher returns in exchange for something that might be too risky for their particular circumstance. But what if the market isn’t rising or falling, but just seems to be flat?
This is where patience comes in. Because we live in an era of cable news and the internet, the practice of patient investing is more difficult than ever. We can’t help but be tempted to react to the news and “advice” we are bombarded with on a daily basis. But we must resist these temptations and be patient. And here is why.
– Patient investors make fewer changes to their investment portfolio which tends to improve returns. Studies have shown that the more often investors alter their portfolio, the lower their returns[1]. Phillip Carret, a legendary investor whose investment career spanned eight decades and had a significant influence on Warren Buffet, explains why brilliantly: “patience allows our emotions to settle and promotes rational decision making. It allows our returns to compound and reduces trading costs”.
– Patient investors who stay invested will not miss the best trading days that are responsible for most of the market’s long term returns. As the chart below illustrates, missing just a few trading days can have a significant impact on long term performance.
PERFORMANCE OF THE S&P 500 INDEX, 1970-2015 [2]
– Patient investors benefit from dividends.
Even in the midst of a market that is delivering flat or negative returns, a long term investor can be pleased to know that they are collecting dividends. A retiree can use these dividends for income, while a younger investor can use them to accumulate more shares, therefore boosting returns when the market recovers.
As author Nick Murray reminds us in his book, Behavioral Investment Counseling, “The fact that the markets aren’t doing what you want them to do – when you want them to do it – is not an indictment of the markets. Nor is it an intelligent basis for significant changes in your investment policy, much less in your portfolio. It is nothing more than a focal point for your own inappropriate impatience.”
In most aspects of our lives, it is human nature to be proactive and to “make things happen.” But action is not imperative for financial success; in fact it can be detrimental. So we encourage you to focus on the big picture and make a conscious decision to be a patient investor. It is the best decision you can make for your financial success and long-term happiness.
[1] “Trading is Hazardous to Your Wealth” by financial economists Brad Barber and Terrance Odean.
[2] In US dollars. Performance data for January 1970-August 2008 provided by CRSP; performance data for September 2008-December 2015 provided by Bloomberg. S&P data provided by Standard & Poor’s Index Services Group. US bonds and bills data ©Stocks, Bonds, Bills and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).
