By Warren Mackenzie on December 20, 2013
There is an old saying attributed to philosopher John Dewey, “Patience is a virtue, possess it if you can, seldom found in woman, never found in man.”
In the investing world, patient investors usually do better than impatient investors. Sometimes it’s because it may take a long time for a stock to realize its full potential. Another reason is that about half the total return from stocks comes from dividends and it takes patience to wait for dividend income.
Impatient investors usually act emotionally and acting on emotions is the sure path to underperformance. Emotional and impatient investors follow the herd and the herd usually heads in the wrong direction. Impatient investors also waste money in trading costs and they lose more because they take higher risks in their desire to make money faster.
However, it’s not always good to be patient. Patience, when waiting for good quality stocks to realize their full potential, is usually a good strategy. But patience, in terms of putting up with incompetence, is always a bad strategy.
Is your advisor competent? In the short term, it’s hard to know for sure, but some tell-tale signs should never be ignored. When bad signs are evident, it is not the time for patience. Inaction when action is required is procrastination, which is almost always a bad thing.
When do you take action and when do you exercise patience?
Be patient when:
- You receive performance information and you know that your portfolio has performed as well as the benchmark.
- Long-term performance is solid, even if there has been underperformance during the past few quarters.
- You consistently earn the rate of return necessary to achieve your financial goals.
- You are well-diversified and are addressing all risks (stock market risk, inflation risk, interest rate risk, currency risk, global economic upset risks, etc.).
Be very impatient when:
- You’re not getting the performance reporting necessary to know how you are doing.
- There is no evidence of an overall investment strategy or process. (The investment process is the most important thing, because you can control the investment process, but you have little control over investment products.)
- Your portfolio is too complicated to manage effectively.
- Your advisor recommends more than half a dozen changes each year.
- Your advisor recommends leverage to boost returns, but has not explained the downside risk in your portfolio or why leverage is required to move you closer to achieving your goals.
- If you have more than 10 mutual funds. (With more than 10 mutual funds, you are over-diversified and you are doomed to underperform because you’re paying active management fees while diluting your active managers’ potential to outperform.)
If you have patience with advisors who are not performing, you should also plan to be patient when it comes to retirement. Long-term underperformance will either mean you will need to work many years longer, or you will spend less time in retirement.
To be successful, investors have to take responsibility for their accounts. That means making decisions, and doing nothing when something should be done is a decision to procrastinate. And procrastinating is often the most costly investment decision of all.