The Second Key to Investment Success

In my last blog post, I discussed Faith in the Future as the first key to investment success. The second key is Patience.

Key #2 - Patience

Some investors don’t lose faith; they simply lose patience. Patience is the ability to wait and delay expectation of positive returns.  Patience is absolutely necessary because positive returns are not provided each and every year, and may not even be provided for many years.  While I know it may be almost un-American to be patient in our world of instant gratification, news feeds, and credit cards, it is patience that is a necessary characteristic of a successful investor. There are two methods of obtaining more patience when it comes to the markets.

First is obtaining a set of realistic expectations. This comes from understanding market history, business cycles, and the  frequency, depth and duration of crushing bear markets and euphoric bull markets. Once you understand that the markets can go off the rails every now and again, you can never really expect anything specific from the markets in any one year. If you are not prepared for both euphoric manias (typically resulting from a new technology) and long periods of depressing poor returns, you will not have the patience to wait things out and will bail out near the bottom. You cannot be a "fair weather friend" to your portfolio by dumping stocks when the going gets rough. You must instead have patience. Think of the pieces of your portfolio as "forever family members" instead of as “fair weather friends”. We certainly must have patience for our family!

Second is keeping the dollars you will need in the next five years (or so) out of the markets. You simply cannot invest capital that you may need in the short-run for emergencies, a home down payment, or college expenses.  Stocks and most bonds are for long-term portfolios. Some investors lose patience and don't have the luxury of waiting for a rebound in the stock market because they put needed cash into the markets when they shouldn’t have and then the bottom fell out of the market.