The power of patience

Being a patient investor sounds simple, but it’s not always easy.

When your portfolio’s performance turns lackluster, you may have an urge to change your holdings. We get it if you do, but that’s when you need to take a pause. Changing your portfolio when your long-term goals haven’t changed could end up hurting more than helping.

There are courses of action to consider. If you can relate to any of the statements below, then read the guidance that follows them.

Say you’re cruising in your car at 70 mph to see a friend. Suddenly, you hit traffic and now you’re bumper-to-bumper. Do you get out of the car and start to walk? No. You will get to your destination, but for a time, patience is required.

Similarly, it’s almost inevitable that a portfolio’s investment strategy hits a rough patch for a time. Being told to “stay the course” can be difficult to hear.

It’s natural to want to take action when the value of your portfolio is decreasing. Behavioral economists even have names for it: “recency bias” and “narrow framing.” When someone is displaying recency bias and narrow framing, they are basing their decisions on short-term periods, and they’re not seeing the big picture.

Let’s say it’s your retirement portfolio that’s declining in value. Your retirement portfolio may have a multi-decade horizon, so any cumulative growth of your portfolio could still be on track to achieve your retirement goals.

Changing your investment strategy could put you off track. This may be especially true if your portfolio is constructed to work with other aspects of your larger financial plan, such as your tax strategies and estate plan. 

The performance of major stock indexes, like the S&P 500, seem to be everywhere – a crawler at the bottom of your TV screen, on your phone, on your laptop. When those indexes are up, you may want your portfolio to be up around the same amount.

The S&P 500 is a large-cap index and may only make up a portion of a diversified portfolio’s stock allocation. If your portfolio is properly diversified, it may consist of a variety of stocks and bonds, including stocks that are included in the S&P 500, the MSCI EAFE Index and other stock indexes, and similar types of bonds which may be included in the Bloomberg U.S. Aggregate Bond Index, among other bond indexes.

The performance of a diversified portfolio isn’t supposed to match these indexes individually. Long term, diversification can work in your favor, with parts of your portfolio perhaps performing better than these individual indexes at times. Just as importantly, your portfolio should reflect your specific risk tolerance and the time horizon of your goals, which these indexes may not.

That said, it may be tempting to change your portfolio to be like someone else’s when you hear about their stellar performance. Behavioral economists call this “peer effect.” Again, your portfolio was designed to serve your needs and financial plan. Changing your portfolio to fit someone else’s means adopting their goals – and their declines when they occur. 

There will always be news events that spark market volatility, and although past performance will not guarantee future results, the market has retained its upward bias over the long term in the face of these headwinds. Let’s allow the data prove that point.

This 50-year chart displays events like the assassination of President John F. Kennedy, Iraq's invasion of Kuwait and the Covid-19 pandemic. The market declined during these events but then was able to resume its upward march over time. We can have a tough time remembering the market’s long-term upward bias during event-driven declines, but that may just be our recency bias!

Remember that market volatility can work both ways. After a negative event drives the market lower, any signal that the situation is improving could result in the market’s rallying – that’s volatility too, volatility we like.

Moreover, in all market conditions, Edelman Financial Engines’ investment management team is closely monitoring your diversified investment portfolio and rebalancing when appropriate.

If you’re interested in modifying your long-term investment strategy because your financial circumstances have changed, talk with your financial planner.

Your planner is here to listen to your financial needs and to discuss the ideas that you both have. Ultimately, your financial planner’s job is to offer their expertise and objective viewpoint and to help create a strategy that pursues your long-term goals in a way that works best for you. After you both talk through alternatives, you may or may not need to make changes.