Introduction
In the world of investing, patience is often the difference between success and frustration. Patience, defined as the ability to endure delay, trouble, or suffering without getting angry or upset, plays a crucial role in achieving long-term financial goals. In this article, we’ll explore why patience is essential in the world of investing and how it can lead to better financial outcomes.
The Frustration of Waiting
Investors have undoubtedly faced their fair share of challenges in recent years. Let’s take a look at the S&P 500 and Russell 2000 indices as examples. It has been two long years since investors in the S&P 500 saw positive gains. Small-cap investors have faced an even more frustrating scenario, with the Russell 2000 hovering at or near the same level it traded at back in November 2020. Depending on your investments, you may be looking at 2 to 3 years of what some would call “dead money.”
In times like these, it’s tempting to throw in the towel and opt for the safety of short-term treasuries, which may be offering 5% returns. However, this decision may not be in the best interest of long-term growth-focused investments. The allure of short-term gains can detract from the potential for higher returns in the future.
Taking a Longer-Term View
During periods of market volatility and seemingly stagnant returns, it’s crucial for investors to maintain a longer-term perspective. Short-termism and recency bias can lead to hasty and ill-advised decisions that may ultimately hinder long-term wealth accumulation.
To emphasize the importance of patience, let’s take a look at historical data. The table below shows the rolling returns for the S&P 500 dating back to 1994. On average, the S&P has produced a 10.3% annual return over rolling three-year periods, a 9.2% return over rolling five-year periods, and an 8.2% return over rolling seven-year periods. However, these are just averages, and investors may experience periods of significantly higher or lower returns.
| Roll Period | Average (Median) | Best | Worst |
| 1 year | 10.62% | 160.57% | -467.84% |
| 3 years | 9.89% | 42.43% | -42.65% |
| 5 years | 9.72% | 35.15% | -17.97% |
| 7 years | 9.02% | 25.75% | -7.76% |
| 10 years | 8.57% | 21.28% | -5.38% |
| 15 years | 8.32% | 19.24% | -0.72% |
| 20 years | 7.95% | 17.90% | 1.60% |
The chart below visually illustrates this concept through five-year rolling returns of the S&P. It demonstrates that during periods like the 1930s, early 1980s, and the 2000s, rolling returns were below average and sometimes even negative. However, after the market bottomed in these periods, rolling returns improved significantly.
5 Years Annualized Rolling Returns over time
“Most Can’t Handle It”
Based on extensive experience working with investors of various profiles and life stages, it’s evident that most individuals struggle to endure poor returns for extended periods. The idea of enduring three or five years of lackluster performance can be daunting, and many opt to exit the market prematurely. However, there are strategies to better position a portfolio for such challenging times, both from a tactical and psychological standpoint.
- Diversify Smartly: One way to protect your investments during volatile times is to diversify across various asset classes and markets. Beyond stocks, consider incorporating bonds, international equities, alternatives, and more to safeguard your portfolio against market volatility.
- Enduring Active Strategies: Understand that certain investment strategies, like value investing or factor investing approaches, may deviate from benchmark returns. Be prepared for these variances and ensure they align with your long-term investment goals.
- Understand History & Market Returns: Some of the most substantial returns in the market come after periods of decline. Patience is especially valuable during these times. It’s important not to be shaken out of your investments when losses occur, as the worst of the downturn is often already in the rearview mirror.
- Take the Long-Term View: Market fluctuations are a natural part of the investing landscape. By maintaining a long-term perspective, you can see beyond temporary downturns and focus on the broader horizon of growth opportunities. This approach allows your wealth to compound over time.
In the wise words of Warren Buffett, “The stock market is a device to transfer money from the ‘impatient’ to the ‘patient.'” This timeless advice underscores the enduring importance of patience and perspective in the world of investing. While short-term gains may be enticing, it’s the long game that ultimately leads to financial success.
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