Tuesday, 20 May 2014

Patience is a Virtue… and Profitable

The importance of human behavior and patience in determining investment success

Long-term investing is making prudent buying decisions of low priced, solid investments that are to be held for an extended period of time. To realize the full return of these investments, you must hold to a set of principles and behaviors to counter human reactions common in the marketplace. This requires a great deal of patience. Overcoming psychological roadblocks which affect investing decisions means you must confront your biggest enemy: yourself.
Holding to a solid set of principles can prove more valuable than technical knowledge. Here are some of them:

1) Avoid frequently reading share prices.
Glancing at daily price movements adds no value to your portfolio, as it may entice you to sell or buy on a whim. It is better to look at quarterly and better yet, yearly returns. It is important to be aware but not consumed by the economic environment—cycle swings are inevitable but have a limited effect on long-term portfolio performance.

      2) Intrinsic value should be the decisive factor when making investment decisions.
‘Price is what you pay. Value is what you get.’—Benjamin Graham. Buying low cost, under priced stocks and mutual funds is a much more sure way of realizing your investment and retirement goals. Prices reflect the current opinions of what others think the stock or mutual fund is worth. These constant changes of opinion should not affect the long-term value of the holding.

      3) Buy a fixed dollar amount of stocks over time regardless of price.
This is known as ‘dollar cost averaging’ which lessens the risk of investing a large amount of money into a stock or fund at the wrong time. The price per unit or share will eventually become smaller and smaller over time, buying more shares when they are low and less shares when they are high.

     4) Short-term thinking should never trump long-term goals.
Market volatility is a short-term phenomenon. With a properly diversified portfolio based on solid funds, long-term investing provides significantly less risk.

By taking a disciplined approach toward your investments, the urge to buy or sell on a whim begins to dissipate, avoiding human tendencies of both panic and greed. Sticking to solid values not only allows for your investment and retirement goals to be more likely realized but also allows for a peace of mind—something that is hard to come by in the investment process.

1 comment:

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