Patience is a virtue; it can also make all the difference between winners and losers in your portfolio. Investors face a barrage of reasons to change their investments almost every day. Whether it’s the Federal Reserve jawboning markets, political rhetoric flowing from Capitol Hill, or rising tensions in the Middle East, headlines seem to suggest we should always be doing something with our money. Yet research and reality say otherwise.
Investors often forget that not reacting to the latest market noise is an option. Surprisingly, not giving your portfolio too much attention may be the best investment decision to boost your financial future. New research from Dr. Michaela Pagel at Columbia Business School uses a theoretical model to understand how investors’ behavior depends on how often they check their portfolios. Since the prospect of losing money typically inflicts more pain than the pleasure of gaining money, investors negatively impact their portfolios by constantly checking them. That’s because the market may decline on any given day, but tends to rise over long periods of time.
“Viewed over a long horizon, the stock market appears relatively safe, because historically it has typically gone up,” Pagel explains. “There’s a pretty good chance the market will go down on any given day or week, but the probability of loss is much lower when you look over a long-run period such as two decades. If you are always more unhappy when you get bad news than you are happy when you get good news, that implies that, on average, looking up your portfolio is painful. Most people, if forced to look at their portfolio every single day, would make a very poor investment decision — they would find it so painful that they would not invest anything.”
What’s the solution to over-trading your investments? Forget about your portfolio — not permanently, but most of the time. If your investment goals carry a timeline of years and decades, there’s virtually no need to check your portfolio daily or even weekly. That doesn’t mean you should completely ignore your investments, but checking on a quarterly or annual basis is usually sufficient. A buy-and-hold strategy often receives praise during bull markets and criticism during bear markets, but real-life examples reveal that focusing on long-term goals instead of short-term fluctuations has monetary benefits.
We’ve all heard of Warren Buffett; one of the wealthiest men in the world and arguably the greatest investor of all time. But what is often overlooked is his extreme patience and ability to ignore market noise. He is on record saying Berkshire’s “favorite holding period is forever.” For example, he has owned Coca-Cola stock since 1988 and has never sold a single share. Of course, that doesn’t mean he actually owns every stock forever. He qualifies that quote by saying the “forever” period applies to “outstanding businesses with outstanding managements.” Sometimes, company fundamentals and C-Suites change, and Buffett reacts accordingly.
Although Buffett is clearly the exception when it comes to market discipline and wealth, other examples provide hope for investors. The Voya Corporate Leaders Trust Fund, ran by Voya Financial, bought equal amounts of 30 stocks in 1935 and hasn’t purchased a new stock since. While some holdings have been spun off or acquired, the fund currently has 21 of the original 30 stocks, including General Electric, Procter & Gamble, and DuPont. The fund has beaten 98% of its peers, known as large value funds, over both the past five and ten years, proving that you don’t have to find the next hot stock or trade on a daily basis to have a successful portfolio.
Main Street provides one of the most extreme cases of patience. Ronald Read, a Vermont gas station attendant and janitor, died last year at age 92. The high-school graduate was known as frugal, and enjoyed eating breakfast at the local coffee shop. After his death, he became known as a millionaire. Over the course of several decades, Read quietly amassed an $8 million fortune with large dividend-paying stocks, such as AT&T, Deere, and General Electric. He is a prime example of what can be accomplished with patience, discipline, and financial literacy.
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