WHAT DOES PATIENCE HAVE TO DO WITH INVESTING?

By in Asset Allocation, Investing

“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