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“The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett

Successful investors develop a number of valuable skills over their lifetimes. You’re not born knowing how to research a stock or how to apply critical thinking to an investment opportunity — those are investing skills some people learn and develop. Patience is an important, but often underused, investment skill we believe many need to develop more fully. We’re not born patient. When we’re young, we tend to care most about instant gratification. Just ask any parent who’s had to deal with temper tantrums. But patience can be learned and, if you’re an investor, learning it could help you reach your financial goals.

Patience often involves staying calm in situations where you lack control. Even if we’re patient in some parts of life, we have to practice and adapt to be patient in new situations. Just because you’re a patient person while waiting in line at the bank doesn’t mean you’re a patient investor. In this article, we’ll explore why patience can be difficult for investors to master, why it’s an important investing skill and how to apply patience to investing.

Why Is it so Hard to Be Patient?

Simply put, your brain makes it hard to be patient. Human beings were designed to react to threats, either real or perceived. Stressful situations trigger a physiological response in people. You’ve likely heard this called the “fight-or-flight” response — either attack or run away, whatever helps alleviate the threat.

The problem is, your body doesn’t recognize the difference between true physical danger (during which fighting or fleeing would actually be helpful) and psychological triggers, like scary movies. Being patient is difficult because it means overcoming these natural instincts. Turbulent financial markets can trigger the response too but, unlike scary movies, there can be real-world impacts you’ll need patience to overcome.

When markets are seesawing and you’re overwhelmed with negative financial media, as we experienced this year during the pandemic-driven bear market, your brain perceives a threat to your financial well-being. Even though stock market volatility isn’t a physical threat, the fight-or-flight response kicks in, emotion takes over, and your brain starts telling you to do something. Your investment portfolio is being harmed! Take action! Now! With investing, action too often translates into selling something because selling feels like you’re shielding your portfolio from further harm. But selling at the wrong time — like in the middle of a major downturn — is one of the biggest investment mistakes you can make.

The Importance of Patience in Investing

“In the end, how your investments behave is much less important than how you behave.” — Benjamin Graham

Benjamin Graham, known as the “father of value investing,” knew the importance of patience in investing. Patience and investing are actually natural partners. Investing is a long-term prospect, the benefits of which typically come after many years. Patience, too, is a behavior where the benefits are mostly long-term. To be patient is to endure some short-term hardship for a future reward.

Warren Buffett also considers patience — or lack of it — a defining trait of success in investing. Why? Because impatient investors let anxiety and emotion rule their decision-making. Their tendency towards “doing something” can lead to detrimental investing behaviors: checking account balances too often, focusing on short-term volatility, selling or buying at the wrong time or abandoning a long-term strategic investment plan. And those bad behaviors could damage investors’ long-term returns.

Selling out of the market during a correction might feel like you’re taking prudent action. And you may even derive some pleasure in seeing the market continue to fall after you’ve sold your equities. But that pleasure could soon be replaced by regret, because consistently and correctly timing the market by selling and buying back in at the right time requires an incredible amount of luck — and we don’t know any investors who have that much luck.

Market research firm DALBAR, Inc. helps demonstrate how investors can be hurt by acting impatiently. Their 2020 Quantitative Analysis of Investor Behavior (QAIB) compares market returns and average mutual fund investors’ returns over the past 25 years ending Dec. 31, 2019. DALBAR found, over that 25-year period, the S&P 500 had an average annualized return of about 10%. The average equity fund investor had an annualized return of only 7.8%.

Why are equity investors failing to earn the average benchmark return? DALBAR attributed the shortfall to psychological factors from individual investors — that means poor market timing. In fact, their research showed equity fund investors typically hold their mutual funds for an average of only 4.5 years. Switching in and out of investments cost investors significant returns over time. As the following exhibit shows, assuming an initial investment of $1 million, the “cost” of such behavior amounts to almost $5 million in lost growth. 

Hypothetical Growth of $1 Million Invested 25 Years, 12/31/1994 to 12/31/2019

Fisher Chart_0908

Source: DALBAR, Inc., as of 04/01/2020. Quantitative Analysis of Investor Behavior, based on an initial investment of $1 million dollars; U.S. stocks are represented by the S&P 500, 12/31/1994 to 12/31/2019.

How to Become More Patient in Your Investing

“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” — Charlie Munger

Being a patient investor might not be easy for you, as Warren Buffett’s business partner Charlie Munger points out. But there are tools to help you overcome impatience. Here are a few strategies you can use to cultivate patience and clarity of thought in your investing decisions.

  • Have a plan and think long term. Set long-term financial goals and keep them front of mind during volatile times. A written financial plan is a great idea. Long-term thinking helps you mentally separate your investing journey from your long-term financial destination. Keeping a long-term perspective will give you the psychological fortitude you need to grow your portfolio over the long term. If you have trouble thinking about the long term during volatile times, consider using a trusted financial professional to help keep you on track. 
  • Understand that market volatility is normal. Just like lines at the grocery store checkout, market volatility is a normal part of life. It might still be unpleasant in the moment, but recognizing that you’ll encounter volatile markets from time to time can help you mentally prepare for corrections or other downturns.
  • Look for fear or fundamentals. Consider whether a recent stock decline reflects investor fear or actual negative fundamentals. If markets are driven more by fear, you may not need to worry too much about it: Fear-based corrections often turn around quickly. Even if fundamentals have declined, markets may be pricing in a future far worse than reality. In either situation, be patient and stick to your investment strategy to help avoid emotional decision-making mistakes.
  • Remember, time is on your side. Take solace in the long history of capital markets. Corrections are temporary and usually brief, and even bear markets eventually end. Historically, markets go up far more often and by a much greater margin than they go down. Owning stocks for the long term is one of the best ways to profit from economic progress, innovation and compound growth.

It’s not easy, but hopefully these practices can help you focus on the long term and take comfort in stocks’ exceptional performance history. The S&P 500’s long-term average annualized return of about 10% includes bear markets and corrections, suggesting timing the market is unnecessary for long-term investors.[i] When it comes to investing, patience and restraint are quite often the most prudent and smartest approach for long-term investors. Next time market volatility strikes, consider patience as an active choice and one of the most potentially rewarding decisions you can make as an investor over time.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

[i] Source: Global Financial Data, as of 04/14/2020. Actual return is 10.08%, based on annualized S&P 500 Total Return Index returns from 12/31/1925 to 12/31/2019.