Patience is a virtue, but it can be difficult for investors to master. Focusing on short-term results may impede progress toward long-term investing objectives, limiting the potential of your portfolio.
Over time, what you invest in may prove less important than your ability to ride out movements in the market.
A Global Investor Study conducted by Schroders Investment Management suggests that impatience is a trait many investors share. The study found that overall, global investors lean toward short-term investing, expecting to hold investments for a little over three years on average. Less than a fifth of investors said they held investments for at least five years.
The tendency toward impatience increases among younger investors. According to Schroders, investors ages 18 to 35 desire a minimum return of 10.2 percent but expect to hold investments on average for just one-and-a-half years. They’re also the least likely to stick to an investment plan.
[See: The Top 10 Investment Portfolio for Millennials.]
Mark McCarron, chief investment officer at Wescott Financial Advisory Group in Philadelphia, says putting money away on a regular basis and selecting the right investments is hard enough without allowing impatience get in the way. In terms of how it can affect portfolio growth, “one only has to look at the returns that the average investor has generated relative to the return of the average fund to see how impatience can cost an investor valuable performance.”
He uses Morningstar’s investor return calculation as an example. This calculation adjusts the official returns of a fund by the monthly flows in and out to calculate a rate of return generated by a fund’s investors. Morningstar’s data shows that for a 10-year period ending in 2016, the average investor in diversified equity funds generated a 4.36 percent return, while the average diversified equity fund returned 5.15 percent. Impatience cost the average investor 0.79 percent per year.
That may not seem substantial, but over time, those lost returns can significantly shrink your investment wealth. “Investors tend to bail out of funds that are temporarily underperforming and invest in funds that have performed well over recent periods,” McCarron says. “The net result is that investors tend to buy high and sell low, which is contrary to generating good long-term results.”
A disciplined approach can help investors capture more favorable returns over time while potentially minimizing losses. Reaping the benefits of patience begins with shifting your investor mindset.
Take stock of your biases. Biases, or the tendency to lean a certain way, can unconsciously influence your decision-making. Recency bias, for example, can lead you to believe that an investment will perform a certain way based on its most recent history. Loss aversion bias trains your mind to seek to avoid losses, rather than pursue equivalent gains.
The difficulty is that these types of biases are hard-wired as part of humans’ natural fight-or-flight response, says Zack Shepard, vice president at Cincinnati-based Matson Money. “We’re still trying to avoid the saber-toothed tiger around the corner, and even though that danger doesn’t exist today, we apply it to today’s environment,” he says.
Pain avoidance can lead to panic and subsequent losses. Shepard says this is what makes rebalancing harder because you have to “go against the herd and force yourself to sell what’s up and buy what’s down even though your brain is fighting you every step of the way.”
[See: 7 of the Best Stocks to Buy for 2018.]
Ken Heise, co-founder and president of Heise Advisory Group in St. Louis, says investors can develop patience by being aware of their own behavioral perception. He uses an arrow as an analogy. When you look at an arrow that’s pointing up, your mind assumes that the arrow will continue moving in that direction. The same is true if the arrow points down. This type of thinking also applies to investing.
“When you have markets that are rising, your brain perceives that it will continue to go up,” Heise says, while subconsciously you believe that a down market will keep dropping. Being emotionally tied to your money in this way makes it easy to react rashly and make mistakes at the wrong times.
Diversification, says Heise, can also help counter impatient behavior. “Having a wide set of assets will spare you from the high highs and the low lows,” curbing impatience and reducing temptation to try and time the market.
Avoid emotional forecasting. Fear and anxiety are often the main drivers of impatient behavior, and they can affect how you invest now and later. “One characteristic of a fear response is to project feelings into the future,” says Chris Chaney, vice president and financial consultant at Fort Pitt Capital Group in Pittsburgh.
Well-grounded investors stay in the present, while distressed investors project their feelings into the future. Their assumptions about what may happen, versus what is happening, with their investments can amplify fear and trigger impatience. Having a plan for practicing patience can minimize projecting behavior.
Routinely reassess your investments to make sure your holdings still align with your objectives. Ensure that your portfolio can cover your near-term needs in the event of a market downturn so there’s no need to sell long-term assets at inopportune times.
“Remember that growth assets are long-term assets,” Chaney says.
Prioritizing goals can help you balance a desire for short- and long-term gains, says Esteban Zuno, regional manager for U.S. Bancorp Wealth Management in Los Angeles. “Knowing what you would like to accomplish, by when, and having a plan to help you meet your goals provides guidance on how to properly allocate your assets,” he says.
Be cautious about comparisons. Heise says investors are often tempted to compare their portfolios to a major benchmark like the Standard & Poor’s 500 index or the Nasdaq composite, but this can be problematic. “If you want the gains of those indices, you also have to accept the losses,” he says.
[See: 7 Things That Can Derail Your Retirement Investing.]
Impatient investors can also run into trouble if they’re using their portfolio’s quarterly performance as a report card rather than a progress report for evaluating their investments. Doing so can make them more susceptible to bias, making them “quick to judge success or failure and make counterproductive adjustments,” McCarron says.
Keeping the context in mind is important when comparing investments in your investing portfolio to one another or the broader market. Shepard says this is crucial because if investors could shift their context to embrace down markets as an opportunity to rebalance and buy investments on sale, market drops would be less scary. He advises impatient investors to “focus on the next 20 years, not the next 20 minutes.”
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Patience Is Your Biggest Investment Asset originally appeared on usnews.com
