Why patience is a virtue in investing

Long time readers will know that I believe in time in the market instead of timing the market. Investment isn’t a short term game. We must think long term. To do so, one must be patient and wait for their investment portfolio to compound itself over the long term.

Unfortunately, many “new” investors who started investing during the COVID-19-induced bull market have been feeling uneasy. 

Fueled by the high inflation rate and rising interest rates, the market has been quite volatile over the past year and a half. It is likely that many investors’ portfolios are doing better than treading water over this short time period. 

On social media, I’ve seen investors changing their investment strategy faster than a politician changes his/her mind. They go from index investing to dividend investing to value investing to growth investing to using multiple investment advisors in a span of less than half a year. They then complain that they haven’t seen any gains during the time period. This leads to them declaring whatever strategies they deployed just simply do not work. Some then conclude that it’s far better to invest in GICs, because GICs provide guaranteed returns. 

I always shake my head and chuckle whenever I read this kind of story – the investor simply has no patience.  

Yes, the last couple of years have been tough. As mentioned earlier, our portfolio’s performance, like the vast majority of others’ as well, has been poor. Our portfolio value has basically been staying flat despite all the new cash we’ve been injecting. It doesn’t take a rocket scientist to figure out why – our portfolio has been dragged down by Canadian banks, Canadian telecom, Enbridge, and TC Energy (well everything else too but these stocks in particular). 

Wouldn’t it be easier for us to sell everything, sit on the sideline, wait for the market to bottom out, then invest all of our cash?

Aside from the fact that it is nearly impossible to know when the market bottom is, history has shown that it is advantageous for investors that stay invested. 

Why being patient is advantageous

It’s important to have patience when it comes to investing and building wealth. Rome wasn’t built in a day and neither should your investment portfolio. 

If I could pick between boring and exciting, I’d pick boring every single day. 

In fact, boring is something we as investors should always strive for when it comes to investing and wealth building. 

As history has shown, waiting and being boring can lead to some pretty sizable gains.

Example #1 – iShares Core S&P/TSX Capped Composite Index (XIC). 

This ETF was basically flat for about 4 years between May 2008 and April 2012. 

t would have been easy for investors to stay on the sideline and just forget about investing completely. But look what happens next over a span of about 8 years, from April 2012 to Feb 2020. 

The market went for a pretty solid run in that period. 

If you had invested $10,000 at the beginning of the time period, stayed in the market, and reinvested dividends, you would have seen a solid gain.

If you stayed in the market during this time and decided to simply dollar average by investing another $10,000 when the sky was falling and everything looked bleak back in February 2009, you would have seen that $10,000 triple to over $30,000. 

Although the last year or so has been quite volatile for XIC, when you zoom out and look at the historical performance, it’s hard not to notice the historically flat areas and the overall upward trend.

There’s a pretty good chance this overall upward trend will continue over the long term. When we look back in 2043 (gee that’s a long time from now), I would not be surprised if the last 1.5 years is just yet another small flat blip on the chart. 

Example #2 – iShares MSCI World Index ETF, XWD with an inception date of June 18, 2009.

Between June 2009 and June 2012, the XWD had a pretty dismal performance. The global market was very volatile during this 3 year period, to say the least. 

But look what happened between June 2009 and June 2019 if you had stayed in the market and reinvested dividends.

You’d have tripled your initial $10,000 investment! 

As expected, the performance in the last one and half years has been poor. However, the overall return has been quite good since the inception of this global index ETF. 

Per iShares, since inception, XWD has returned 11.04% annualized. This is quite amazing given the global market has gone through several recessions and bear markets since June 2009. 

Lessons Learned 

So what are some key learnings from these two examples above? 

One, the market can be volatile over the short term and can stay flat for a number of years. Nobody really can predict whether the market will go up or down in the relatively short term (i.e. within a year). Over the long term, however, the market tends to go up. 

There have been 10 market selloffs in North America since 2000. If an investor stayed in the market throughout this entire time and continued to invest money regularly (aka dollar cost average), the investor has gotten rewarded handsomely. 

Key learning number two is that dollar cost average is awesome and everyone should deploy this simple yet effective strategy. 

Three, it’s important for us to separate our emotions from investing. Your ego is definitely not your amigo when it comes to investing.

While there are a lot of debates between dividend investors and index investors on which strategy is better than the other, I think we need to remember that academic research is purely based on results on paper. The results can be different in reality because they may miss one important factor – human psychology. 

When you’re investing with your hard-earned money, the psychology is considerably different. This is why learning to invest using paper money will be completely different than investing with real money. 

We can debate until the cows come home on whether dividends are relevant or not. But I believe having a steady dividend income will prevent investors from making irrational decisions, like selling on impulse. 

That itself gives dividend growth investment a lot of merit. 

Finally, total return matters. Just because you get regular dividends, it doesn’t mean you should forgo capital appreciation. 

Summary – Why patience is a virtue in investing

It’s vital to develop a long term investing strategy. Avoid the short term noises. Most importantly, stick to your investing strategy, instead of trying to change it every six months and chase the next big thing. Get in line and stay in line! 

Remember, your portfolio is like a bar of soap, the more you touch it, the smaller it’ll get. I can’t emphasize enough the importance of being patient and letting your money compound.

I’ll end this post with lyrics from The Patient by Tool, one of my favourite songs. 

“A groan of tedium escapes me

Startling the fearful

Is this a test? It has to be

Otherwise I can’t go on

Draining patience, drain vitality

This paranoid, paralyzed vampire act’s a little old

But I’m still right here

Giving blood, keeping faith

And I’m still right here

But I’m still right here

Giving blood, keeping faith

And I’m still right here

Wait it out

Gonna wait it out

Be patient (wait it out)

If there were no rewards to reap

No loving embrace to see me through

This tedious path I’ve chosen here

I certainly would’ve walked away by now

Gonna wait it out

If there were no desire to heal

The damaged and broken met along

This tedious path I’ve chosen here

I certainly would’ve walked away by now

And I still may, I still may

Be patient

Be patient

Be patient

I must keep reminding myself of this

I must keep reminding myself of this

I must keep reminding myself of this

I must keep reminding myself of this

And if there were no rewards to reap

No loving embrace to see me through

This tedious path I’ve chosen here

I certainly would’ve walked away by now

And I still may

And I still may

And I still may

And I

Gonna wait it out

Wait it out

Gonna wait it out

Gonna wait it out”