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Your Edge on Wall Street? Time is On Your Side
Trust your advisor, turn off CNBC. Wear patience on your sleeve. Your shareholders (you and your family) will thank you.
If there’s one thing you need to take away from this post, it’s patience. Much of our world is obsessed with the short term. McDonald’s will fling you a Big Mac (fast!) Calvin Johnson can run a 40 yard dash in 4.32 seconds (faster!), and Google can deliver you search results in 0.48 seconds (fastest!). In the increasingly digital era in which we dwell, speed is synonymous with success.
And yet, speed, on Wall Street, is synonymous with risk. The get-rich-quick mentality is a flawed one for investors, especially when the volatility of the market is more pronounced with the shorter the sample size. In the short term, even a highly diversified portfolio can materially decline. Take the long term approach, however, and the playing field changes.
Individual investors have a giant advantage over institutional managers. The secret? Time. While you are investing to fund your retirement for the next twenty years, Hedge Fund Managers and Wall Street traders are working to impress clients during the next quarter. That your time horizon is measured in years or even decades provides a major advantage: the odds of losing money drops significantly the longer the time period that you’re invested.
Source: The Motley Fool: Robert Shiller, author’s calculations. 1-day returns since 1930, via S&P Capital IQ.
The chart above shows the percentage of holding periods that generated positive returns over the last 137 years. Hold stocks for a day, a month or even 9 months and the odds you will lose money are about the same as flipping a coin. But time brings success: 88% of holding periods of ten years or more produced a positive return. Investors who held on over 20 or 30 years never lost money, and this real return accounts for inflation.
Patience is the key. And even though patience may be boring… especially when you want to shift your entire portfolio into the next hot IPO… Patience can be achieved by following these three steps:
- Maintain an investment in common stocks over a large number of years
- Reduce (or minimize) the risk of catastrophic loss
- Minimize the annual costs of investing.
Maintaining an investment over a large number of years means you putting aside your get-rich-quick emotions, revisiting your long-term investment plan, and rescinding your “Let’s-go-to-Vegas” finger from the Buy/Sell Bellagio button.
Minimizing the risk of catastrophic loss is achieved when you cultivate a highly diversified portfolio. This means investing in a large number of stocks of all kinds: large-cap, mid-cap, small-cap, domestic, and foreign. Also, add to your portfolio after losses occur and take some profits after excessive gains.
Reducing the annual costs of investing means avoiding excessive trading, high management fees, and understanding the implications of income taxes.
So, before you throw patience to the wind… remember, unlike those on Wall Street you are not under the gun to perform and deliver right away. Take the long term, patient approach and tee yourself up to reap the rewards of long term earnings 10, 20, even 50 years from now.