WHAT DOES PATIENCE HAVE TO DO WITH INVESTING?

By on May 4, 2011 in Asset Allocation, Investing | 16 comments

“All good things come to those who wait.” Old English proverb

I’ve been thinking about patience a lot recently. Plenty of uncertainty going in the Friedberg world these days. With a big move pending this summer, a house on the market, and a new job for El Carino, our lives are in flux! 

INVESTING

We save the maximum amount allowed by law in our retirement accounts and have done so for many years.

While finally getting around to filing our 2009 portfolio records I noticed something absolutely astounding.

Over the last sixteen years, our retirement accounts have grown to levels I never would have predicted. These funds were invested monthly in predominantly stock index funds. The time period includes the recent “dead decade” of practically no growth in equities.

How did this happen? By dollar cost averaging we bought more shares at lower prices and less when the share prices were high. This ensured that our average cost per share was low. In fact, it is the perfect way to “buy low.” 

Obviously, with the recent market rebound, the value of our portfolio is substantially better than it was two years ago, our patience is rewarded.

When the market tanked, we continued our plan.

I know lots of folks who pulled out of the market when it declined. How do you think they fared?

HOW DOES TIMING THE MARKET WORK?

If you pull out your money when the market drops, you lock in the “paper loss” and make it real. Compound the loss with declining to invest during a low price environment. Furthermore, you have another decision to make; when to get back in the market? That is the most difficult question of all.

How will you know when the market is ready to turn the corner and rebound? The simple answer, you will not know.

Vanguard and others have done research comparing remaining in the market through the ups and downs with jumping in and out.

Guess what? Those who stayed in through the ups and downs had better overall returns than those who tried to time the market. 

WHAT TO DO NOW

Shiller’s 10 year trailing PE ratio of 23 indicates that the market is highly valued. If you use a forward PE ratio, the S & P 500 sports a low ratio of 13.55 according to the Wall Street Journal.

So what is the investor to do?

Easy, with retirement money and those funds you don’t need for the next ten years, stay the course.

I promise that during the next ten years the market will have a down year or two. The markets are cyclical and ups and downs occur.

Be patient and understand the economy. Markets go up and down. Unless you believe the entire world economies are at risk of halting their growth indefinitely, continue investing.

Over the long term, you will likely see excellent compounded growth of your assets.

Caveat: This is not a recommendation to buy or sell and you should consult your own investment advisor before making any investment decisions.

ACTION STEPS:

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it for all of your personal finance goals, thoughts, activities, and plans.

  • Spend an hour or two reading about the history of the markets.
  • Vow not to jump in and out of your long term investments. Set an asset allocation you are comfortable with and stick with it.
  • Don’t check the value of your retirement assets too frequently.

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Are you patient with your financial progress? or Do you lean more towards jumping in and out of the market?

image credit; blamstur

    16 Comments

  1. Hi Barbara,
    I completely agree with you about being patient when investing. Some investors are so eager to sell once they see a stock doing poorly, but that’s just a property of the market. There’s recessions and expansions, lows and highs. The hardest part is picking the right stocks for your investing goals and not letting fear force you out when the market’s bad.
    Thanks for the read,
    Timothy

    Wealth Artisan

    May 4, 2011

  2. @Wealth-I really like your last statement, “not letting fear force you out.” I couldn’t agree more! Once an investor understands that ups and downs are a normal part of investing, it may be easier to stomach the “downs.”

    Barb

    May 4, 2011

  3. I don’t know if it is patience or my inability to time the market! I would like to think I am confident in my asset allocation and I am prepared to stick with it. I agree with you as long as you are dollar cost averaging into the market. If you do not, your investments should be sufficiently diverse (broad index) that volatility doesn’t destroy you.

    krantcents

    May 4, 2011

    • @Krantcents- You hit the key points; maintain a consistent asset allocation and keep investing through thick and thin. If history is any guide, your investments should continue to advance over the long term.

      Barb

      May 4, 2011

  4. This is exactly why I did quite a bit of research on the mutual fund I finally decided to purchase – I looked at the historical average and decided that over time it will grow nicely. It’s not an exciting fund (I chose a taxable bond fund – with auto-debiting I didn’t have to make an initial investment) but it should be a nice little sum in 20+ years.

    Little House

    May 4, 2011

  5. Excellent advice Barb! Patience has everything to do with investing!

    MoneyCone

    May 4, 2011

  6. @ Little House- Great time horizon! 20 years is a great long term viewpoint. And with dollar cost averaging, your overall cost per share should be reasonable.
    @Moneycone-I’m focusing on patience a lot these days. Easier said than done :)
    @Mark-Excellent point. The overall investors would be served well by a bit more patience.

    Barb

    May 4, 2011

  7. Patience is huge, even when trading stocks. You have to accept the volatility that comes with the market and be patient with your trades. You have to remember that you bought a company for a reason, and price fluctuations shouldn’t change that. Be patient!

  8. @Robert-”You bought a company for a reason!” VERY IMPORTANT REMINDER. Thank you.
    @Jeff, I’m glad you reiterated this point. Jumping in and out of the market is a fools game.

    Barb Friedberg

    May 5, 2011

  9. Yes, patience is very important with investing but also in nearly every other aspect of personal finance as well i.e. saving, paying off debt, etc.

    Dana

    May 6, 2011

  10. Hi Dana, I could even expand you statement to “patience is important in life!” Thanks for chiming in.

    Barb Friedberg

    May 6, 2011

  11. Yup patience and discipline. It so hard for many investors to keep their discipline as the market tanks or swing violently. As you say, stay the course over the long run and everything will work itself out.

  12. Hi Travis, Clear and to the point advice!

    Barb

    May 7, 2011

  13. I have a web site where I give advise on penny stocks and stocks under five dollars. I have many years of experience with these type of stocks. If their is anyone that is interested in these type of stocks you can check out my web site by just clicking my name. I would like to comment about patience when it comes to investing . this could be the most important thing that keeps investors from being successful when it comes to their investments. When companies years ago had defined benifit plans unlike today the primary investment vehicle for those employed is the 401 K their was no emotion involved in the decision making process when their were just defined benifit plans because the plans were managed by a third party the employes had nothing to do with making the investment decisions this was left to usually an investment managment company.

    james moylan

    May 28, 2011

  14. Great to see that being patient paid off! I was actually just wondering the other day if the past “lost decade” would really have been lost if you stayed the course with dollar cost averaging and periodic rebalancing.

  15. @Jacob-Excellent question. The answer is NO. If one had maintained a balance of 60% stocks and 40% bonds and balanced periodically, their return would have far surpassed that of 100% stocks.

    Barb

    June 4, 2011

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