A fundamental attribute for being a successful investor is the virtue of patience.
This is having the patience to focus on achieving your long-term goals and sticking to your portfolio’s target asset allocation without being thrown off course by inevitable bouts of sharp rises and falls in markets along the way.
Impatience must surely rank as one of the most self-destructive investor traits identified by behavioural economists.
An impatient investor is vulnerable to fleeing from the equity market when share prices are falling and to jump back into their market after prices have risen sharply.
And an impatient investor is vulnerable to dumping an active fund manager that is going through a patch of underperformance and switching to the latest top performer based on the most recent short-term returns.
The most-recent update to a key Vanguard research paper, Keys to improving the odds of active management success, names three factors “most critical” to improving the probability of investment success with actively-managed funds.
These factors are low investment management costs, investor patience and fund manager talent (culture, people, philosophy and process).
Whether or not an investor is using index-tracking funds, actively-managed funds or a combination of both, patience is crucial (along with low cost and selection process).
“Low costs and a rigorous, thoughtful manager selection process can go a long way to improve results for investors,” the Vanguard paper comments. “But these benefits can be eroded significantly if an investor fails to maintain a long-term perspective because of the inconsistency inherent in returns.
“Understanding this principle is critical for those who may be tempted to use short-term past performance as a basis for entering and existing active markets,” the research paper adds. “In addition to confirming the difficulty of selecting a winning manager, our analysis shows that historically, investors have had to be very patient to succeed with active funds.”
The researchers found that of the 2085 active equity funds available in the US at the beginning of 2000:
- Only 952 (46 per cent) were still operating 15 years later on December 31, 2014.
- Of these surviving funds, just 552 (26 per cent of the original funds) managed to outperform their prospectus benchmarks after fees over the 15 years.
- Most of the surviving outperformers experienced “frequent and sometimes extended” periods of underperformance along the way.
- More than 98 per cent of the surviving outperformers lagged their prospectus benchmarks for at least four of the 15 calendar years examined. Indeed, more than half had seven years or more of underperformance.
“Investors may be able to withstand individual periods of poor results scattered over a 15-year time frame,” the researchers observe. “But for many, three consecutive bad years is the breakpoint after which they will divest the fund.”
Patience is more than a virtue; it can contribute markedly to long-term investment success.
If you’re serious about making smart financial decisions and increasing the probability of living a financially secure life in the future we welcome the opportunity to talk further with you.