How to Invest With Patience
With parts of the stock market reaching all-time highs, some investors may be tempted to wonder when the next meltdown is coming. While the media will print scary headlines, the truth is that nobody knows. While you may have heard investment mantras like “be patient,” it’s an entirely different thing to actually be patient once volatility strikes.
So how can we be more patient? James Clear in Atomic Habits says “Disciplined people are better at structuring their lives in a way that does not require heroic willpower and self-control.” Put more simply, they remove temptations.
One of the main goals of having a financial plan that dictates an investment plan is to make it easier to make sound financial decisions. Regardless of what the stock market is doing, before making changes to your investments, you should ask yourself “Given the weighty evidence of history, does making this decision make me more or less likely to reach my financial goals?” Sometimes changes or needed – but often sitting on our hands is the best medicine.
One of the best ways to have patience is to know what assets you are using for spending in the near term (0-5+ years). A properly structured portfolio should have adequate reserves for short-term spending in less volatile investments.
For example, let's say a retiree has 60% in stocks and 40% in conservative investments (bonds/cash). They need 5% per year for spending so they have 8 years of spending in conservative investments (5% x 8 years = 40%).
During the first 3 months of the 2020 COVID crisis, where stocks fell 30%, the cash and bonds held up well.
(I assume they have 60% in stock (SPY), 30% in bonds (AGG), 5% in short-term bonds (BSV), and 5% in cash (Cash). This is not a recommendation to buy or sell).
While this hypothetical investor would be down nearly 20%, they could reframe this as “The money I’ll need in 8 years is down 30%, and the money I need for the next 8 years is flat.”
Adopting this perspective may help alleviate the stress or short-term volatility, giving them the patience to stick to a long-term investment plan.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.