Investor Psychology

Investment Patience is a Virtue

Investors who can keep their focus on the long term when others get distracted (and distressed) by short-term drama should see their patience rewarded down the road.

Patience is defined as “The capacity to accept or tolerate delay, trouble, or suffering without getting angry or upset.” Eighteenth-century philosopher Jean-Jacques Rousseau once said, “Patience is bitter, but its fruit is sweet.”

As is true in many areas in life, investing requires a tremendous amount of patience. Individuals often become increasingly uncomfortable in times of volatility, and inevitably shift their focus from long-term goals to short-term anxiety. A major contributor to this phenomenon is what is referred to as “recency bias.” Recency bias is the tendency to believe that trends and patterns of the recent past will continue in the future.

The financial crisis of 2008 epitomized this thought process for many investors. Some of the most educated, long-term investors became increasingly more skeptical as the early days of the 2008 crisis turned into weeks, and the weeks turned into months. These same investors became so susceptible to the fear caused by the market’s downward spiral that they lost the patience and discipline needed to stay the course.

Who’s your worst enemy?

Benjamin Graham, the father of value investing, once said, “The investor’s chief problem — even his worst enemy — is likely to be himself.” As financial advisers, we play many key roles in the lives of our clients, but one of the most important is helping our clients stay focused on the long-term game plan. All of the work we do in terms of research, allocation, diversification, risk management, cash management, etc., is meaningless if investors lose sight of their long-term investment goals.

As an exercise, think back to a time in your life when you were excited to begin a new challenge. You knew this challenge would not be easy, and that it would probably require a significant amount of sacrifice in the short term. Ultimately, however, it would benefit your life over the long term. Maybe your challenge was to start a fitness program, initiate healthier eating habits, or become a better parent. Whatever the challenge, there were probably a few bumps along the way.

These sorts of life challenges can be comparable to the challenge of investing for your future. Success is dependent upon a certain level of patience. A tremendous amount of discipline and fortitude may be required along the way, but most of all, success requires patience. Patience is the vehicle that allows discipline and dedication to turn into progress.

Bad news can breed irrationals moves

Mark Twain (and possibly several others before him) once said, “I’ve suffered a great many catastrophes in my life. Most of them never happened.” Many investors have a natural tendency to focus so much of their attention on the negative news of the day that it dominates their thoughts. Their short-term focus on negative market reports leads to anxiety, which can then lead to irrational investment decisions.

Heightened investment caution is certainly justified in many situations. We do not advise clients to bury their heads in the sand and ignore their investments. However, to extrapolate the most recent economic events into a future theory can be a mistake. Appropriate risk management requires perspective and balance — especially during times of volatility.

During times of market turmoil, it often seems justified to take some type of immediate, decisive action — just because. But actions based on haste and prognostication often backfire, leaving investors with bitter regret for their swift, but emotional, responses. We may not be able to entirely control our emotions during tough times, but we should try to consistently heed the wisdom our mothers imparted as we were growing up: Patience is a virtue.

Remember …. your mother is always right!

About the Author

Chris Kelly, CPA, CFP

Financial Adviser & Portfolio Manager, Baltimore-Washington Financial Advisors

Chris Kelly is a Certified Public Accountant (CPA) and a Certified Financial Planner™ (CFP®). He holds a B.S. in finance from the University of Maryland and a master's in accounting from George Washington University. Kelly assists clients with the implementation of their personal financial plans, investment tax strategy and overall financial risk management. He takes great pride in maintaining a relationship based on trust, transparency and accountability with each of his clients.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package
Coronavirus and Your Money

Biden Calls for $1,400 Payments as Part of $1.9 Trillion Relief Package

Under Biden's plan for a third stimulus check, the $600 second-round stimulus checks would be increased to $2,000.
January 14, 2021
When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President-elect Joe Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 18, 2021

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Is the Stock Market Open on Inauguration Day 2021?
Markets

Is the Stock Market Open on Inauguration Day 2021?

The federal government will enjoy an off day on Inauguration Day, but the stock and bond markets alike will conduct business as usual.
January 19, 2021
10 New Year’s Financial To Do’s (You’ll Feel Great When You Check Them Off)
retirement planning

10 New Year’s Financial To Do’s (You’ll Feel Great When You Check Them Off)

Once you run through this checklist, you’ll be in great shape for a prosperous and organized new year.
January 18, 2021
Fund Your IRA, Cut Your Taxes
Tax Breaks

Fund Your IRA, Cut Your Taxes

There’s still time to make a 2020 IRA contribution and lower your tax bill.
January 13, 2021