Lately, I’ve been covering the essentials of rational investing during volatile markets. We’ve now tackled being disciplined, sensible, and vigilant with your investments. Today, let’s talk about being patient.
Patient resolve may sound simple, but I believe it’s one of the hardest skills for most investors to master. It’s also top of mind for me, because I’m writing this in an airport, awaiting a delayed flight. While my impatient self is a little stressed about it, my rational self knows I’ll eventually make it home okay.
Likewise, investor patience requires you to have faith that your portfolio will deliver you to your desired destination over time. Here, we’re not just talking about being patient for a few hours. Patient investing is measured in decades before meaningful results emerge.
Consider this simplified example. Say you invested $5,000/year at 7% (ignoring taxes).
- After 10 years: You’d have $74,000. That’s $50,000 of your own contributions + $24,000 in market returns, at a ratio of about 2:1 personal sweat equity vs. market performance.
- After 20 years: You’d have $220,000. That’s $100,000 from you + $120,000 in returns, at a ratio of 1:1.2 you vs. the market.
- After 40 years: You’d have $1.07 million. That’s $200,000 from you + $870,000 in returns, at a ratio of 1:4.7 you vs. the market.
Clearly, the more patient you are, the more market power can work in your favor. The math is simple. As you make “profits” (returns), the profits make profits, until they far exceed your own efforts. But there is no way to accelerate this process. It takes long stretches of time, making it both simple and hard to do.
There is one way impatience can serve you well. If you’re not yet patiently investing, hurry up and get started. After all, if you wait a week to plant a tree, it will forever be one week smaller than it would have been. Same with your portfolio, except trees don’t grow geometrically like investments can.
So, what are you waiting for? Let’s get patient today – at least with your investing.
Written by John A. Frisch, CPA/PFS, CFP®, AIF®, PPC®