Investment professionals always preach patience in their advice to clients. Be patient with the market, with the strategy you are implementing, or with the cash you have on the sidelines. It’s something that everyone talks about, but no one truly defines.
How long do you need to be patient? Is that a week, a month, a decade, or a lifetime?
Patience is something that can easily wear thin if you aren’t positioned to benefit from the current trend in stocks or bonds. A lack of patience can ultimately lead to bad decision-making if you capitulate to anxiety or deviate from the course that you initially intended.
The truth is that patience is different for every investor.
It’s ultimately rooted in your investment philosophy, conviction, and emotional fortitude.
If you are a buy-and-hold investor, then it’s never a bad time to put money to work and you simply have to tune out the swings of the market. Your patience is likely going to be rewarded over the course of very long periods. Years or decades may pass when it seems like you are throwing good money after bad. Then a prolonged bull market shows just how effective it was to stay steady and tolerant of the madness.
Active investors may have a more difficult time defining their “patience level”. I think of it as being positively correlated to their conviction in a specific outcome. The more adamant they are of a certain result, the more likely they are to stay committed with the original investment thesis.
They are likely willing to wait for the right opportunity to come along, but may also be more susceptible to performance chasing or profit taking based on a perceived valuation levels.
For example, swing traders may find themselves waiting in cash for weeks or months before deploying capital in areas of the market that look favorable. They may only hold those positions for short periods of time depending on how these trades develop. Their patience level is more driven by market forces and trading setups rather than any definable time frame.
Those who are more aligned with a strategic focus or asset allocation approach may be more content to wait for trend changes to develop over months or years. Often times these investors will be able to retain some level of minimal correlation with the market that reduces restless impulses. Nevertheless, they must also be careful not to succumb to the urge to take action simply for the sake of doing something.
Patience can also be bolstered by education, data, and a comprehensive understanding of your risks and opportunities. Don’t underestimate the power of information. This is a critical component of staying the course with any investment strategy. You must be able to easily understand your current path and why it is beneficial for your goals.
You must also be open to the concept that your thesis, strategy, or investment may be wrong. There is no shame in being wrong in the market. The only shame is in staying obstinately wrong when an overwhelming amount of information disproves your plan. Patience should not be used as a deflection or justification in this instance. It will only lead to detrimental effects on your wealth.
Until next time,
David Fabian is a Managing Partner at FMD Capital Management, a fee-only registered investment advisory firm specializing in exchange-traded funds. He has years of experience constructing actively managed growth and income portfolios using ETFs. David regularly contributes his views on wealth management in his company blog, podcasts, and special reports.