The value of patience

Investors, as a group, make plenty of mistakes. When it comes to investing, bad decisions are not the exception, but the rule. Investing mistakes stem from a variety of influences: ignorance, gullibility, fear and greed, to name a few. But I find impatience to be one of the most pervasive, and underappreciated, drivers of bad investment moves. The burning desire to act immediately, to do something, anything, right now, underlies many of the bad decisions investors make.

The desire to act is part of the American way. We’re all responsible for our own fates, goes the thinking. Life is full of opportunity, and it’s what you do with that opportunity that determines your success or failure in life. At least, that’s the theory. Unfortunately, when it comes to managing an investment portfolio, more activity usually does more harm than good. In large part this is because of uncertainty. Unlike many other things we work hard at, the results of our investment activity are uncertain. If you want to build a brick wall, keep laying bricksand you’ll eventually have a wall. Skill plus action almost certainly equals success.

But investing is different. It is a competitive endeavor. To reap superior profits — or, beat the market — you must take them away from another investor. This other investor, and all of the others, would rather not give these profits up, and would like to take yours from you instead. The more active you are in the investment markets, the greater the opportunity for mistakes — and losses. If you want to be successful in this game, you’ll have to be careful and defensive.

As an investor, I encourage you to think of cash as your most valuable economic resource. While your wealth is in cash — or a cash-equivalent like the G Fund — it’s safe. It can’t be lost. Safe is the most attractive position to be in as an investment manager. Putting your cash at risk by deploying it into risky assets — like stocks, bonds, real estate or commodities — is something you should try to avoid unless you can’t achieve your life’s objectives any other way. If you can keep all of your wealth in cash and safely afford to live the life you want, why put your wealth, and your standard of living, at risk? If you must take risk to earn the return you’ll need to afford the life you want, then do it prudently. Only invest the amount necessary, and only invest that in a way that is risk-efficient; that is, in a way that is expected to produce the returns you’ll need with a minimum risk.

This goal of investing the minimum amount necessary, and subjecting that amount to the least risk possible while achieving the returns you’ll need, is inherently boring. It requires long periods of time without any activity at all. In my practice, the default frequency for measuring the progress of an investment plan is once about every six months. It’s possible that something could come up to disrupt this schedule, but that’s the exception and not the rule. If I were you, I’d want to know, about every six months, where my portfolio is compared to where it needs to be to safely support my desired lifetime standard of living. If it’s larger than it needs to be, then I’d reduce its exposure to risk. If it’s smaller than needed, I’d increase the level of risk. That’s it. No other activity should be required.

The time to deal with market events is not when they happen, but before they happen, during the planning process, when you configure the investment strategy you’ll employ. This strategy should be selected to allow enough room for the kind of market events that could occur, and not be derailed by these events, should they come to pass. Trying to react to market events in real time will do more harm than good in the long run. So, develop a solid investment management plan and focus on maintaining the patience it will take to implement it the way it is designed. If you’ve done things right, the best investment move is often to sit tight and do nothing at all.