The Patience Principle
Global markets are providing investors a rough ride at the moment, as the focus turns to China's economic outlook. But while falling markets can be worrisome, maintaining a longer term perspective makes the volatility easier to handle
A typical response to unsettling markets is an emotional one. We quit risky assets when prices are down and wait for more "certainty".
These timing strategies can take a few forms. One is to use forecasting to get out when the market is judged as "overbought" and then to buy back in when the signals tell you it is "oversold".
In this instance, there is very little evidence that these forecast-based timing decisions work with any consistency. And even if people manage to luck their way out of the market at the right time, they still have to decide when to get back in.
A second way is to reflect on how markets price risk. Ove the long term, we know there is a return on capital. But those returns are rarely delivered in an even pattern. There are periods when markets fall precipitously and others when they rise inexorably.
Markets rarely move in one direction for long. If they did there would be little risk in investing. And in the absence of risk, there would be no return.
Timing your exit and entry successfully is a tough task. Look at 2008, the year of the global financial crisis and the worst single year in our sample. Yet, the MSCI World Index in the following year registered one of its best gains ever.
Second- guessing markets means second-guessing news. What has happened is already priced in. What happens next is what we don't know, so we diversify and spread our risk to match our own appetite and expectations.
If your horizon is five, 10, 15, or 20 years, the uncertanity will soon fade and the markets will worry about something else. Ultimately, what drives your return is how you allocate your capital across different assets, how much you invest over time, and the power of compounding.
BUT in the short term, the greatest contribution you can make to your long-term wealth is exercising PATIENCE. And that's where your advisor comes in.
