I have stated in a number of my previous publications that education, humility and patience are some of the key traits an investor should possess in order to attempt to be successful and come close to achieving his/her investment objectives.
In any aspects of life, patience is a virtue, but it can be extremely difficult for investors to excel in; even the seasoned ones. It is particularly for investors to become impatient and expect results in a short period of time. It is a known fact, obvious to most but not for all as emotions play an important role, that focusing on short-term results may impede progress toward achieving long-term investing objectives, thereby limiting the potential of and investor’s portfolio. In fact, an investor’s patience and courage to ride out market fluctuations over a long period of time may be more important than what s/he actually invested in.
Investors share quite a number of traits, and impatience is up there with one of the most common. In fact, from a study conducted by Schroders, investors who had an investment horizon of 5 years or more tended to grow impatient and that investment horizon quickly turned into a 3 year investment. Much of this can be explained by demographics (investor age), investor education, and the reason why that particular investor invested his/her money in the first place, and whether that investor was (made) aware about the risks related to the exposures the investment portfolio was being exposed to.
Investing is already stressful in itself. Putting either lump sums into an investment or smaller amounts at regular intervals without witnessing the fruits of that investment could be frustrating to say the least. Impatience cost investors lots of money. Not following adequate investment advice. Steering away from original investment objectives and goals. Undertaking more risk than is tolerable (in the hope of making short-term gains) could prove detrimental and might prove even harder to recover from.
Over a short-period of time, the cost impatience might not add up to much, but over a longer period of time, when seen cumulatively, this could equate in to a significant amount, one that shrinks investor wealth. Investors tend to exit from investments which have temporarily underperformed into securities which have performed well, thereby running the risk of buying high and selling low, which is clearly not commensurate with generating good long-term results.
Investors can develop patience by being aware of their own behavioural traits. Being emotionally tied to money makes an investor more prone to react impulsively and make uncalculated mistakes at the most inopportune of moments. Having a diversified portfolio will enable a portfolio’s return to be smoothened over a longer period over time and will reduce an investor’s temptation to try and time the market. I cannot but stress the importance for investors to routinely reassess their investments, ensuring that the holdings still align with their objectives and that the investment portfolio still serves as an insurance for them to cover short-term needs in the event of a market correction.
A common factor we have recently seen in investors, following the implementation of MIFID II on 03 January 2018 is that, at no fault of their own (but as a result of periodical regulatory reporting requirements), they are now having access to portfolio statements more often than they had been accustomed to in the past, and are now in fact receiving quarterly portfolio statements. This has in fact made them more susceptible to act quickly to judge failure or success, causing them to pass unnecessary judgements at times. Investors ought to focus on investment results over a 5 year period and not over a 5 month or even 5 week period.
On the flipside, however, even though the investors are indeed receiving frequent reporting, and might result in viewing more frequent fluctuations, it also means that they have the opportunity to speak to a professional on a more frequent basis. The adviser will go through their specific assessment and remind the investor that the objective is aligned with a long term goal assuring the investor that the portfolio is on the right track even though in the short term it might not seem so.
Furthermore, if there is a change in the investor’s circumstances, the adviser can realign the portfolio with the new goals. It is therefore stressed that funds for investment should be free from any immediate dependencies and planned emergency funds are kept at bay. This will ensure that even through the troughs and downfalls, one can stay invested comfortably within the planned timeframes, investment parameters and risk tolerance levels.
Disclaimer: This article was issued by Mark Vella, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.