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Invest Like You are Fishing: Patiently

With our constant exposure to the media, whether on TV, the internet or social media, we are always in touch with what is going on in the world.  In that same vein, we are also constantly force-fed everyone’s opinion. Everyone is an expert.  This is especially true in the financial world.  Someone is always calling for the next market crash, while someone else is always calling the start of the next big rally. It is very easy to get caught up in the tug and pull of various pundits and start questioning what we should all do with our money.  With all of this noise out there how do we make proper financial decisions? The key is to invest the same way we fish, patiently.

Now I don’t want to confuse people here.  I’m not saying we should always just wait things out or not make quick decisions if something truly market moving occurs.  I am saying that for the long term investor, investing patiently is one of the major keys to success. So what does investing like a fisherman really mean?

Volatility will happen: It is human nature to be driven by fear and greed but as an investor letting these be the driving forces behind your decisions can be dangerous. It is important to understand that volatility will happen and it is normal. Historically the S&P 500 has a standard deviation of just below 15%. In simple terms that means that 68% of the time the annual return will fall within 15% of the historical average mean of 9.8% (a range of -5.2% to 24.8%) and approximately 95% of the time, the return will fall within 2 standard deviations (-20.2 to 39.8). Since 1928 the total annual return has only finished between 5 and 10% 6 times. Sorry for getting technical but it is important to understand that markets rarely march higher in a straight line.  The market experiences fluctuations in both the positive and negative directions. If market volatility is keeping you up at night that isn’t an indication that you should just sell everything.  It is an indication that you need to rethink your entire investment plan and realize you may have a lower risk tolerance than you thought

Don’t make rash or emotional decisions: Volatility is only one of the many variables that may drive your investment decisions.  The patient investor doesn’t let volatility or any other variables force them into making a quick, emotional decision.  Emotion can be a very powerful force in all aspects of life but should be moved to the side when making financial decisions.  Emotion can easily cloud rationality and put you in a position where you are not evaluation a situation based on all the facts.  As an investor, if you feel yourself making an emotional judgment about something it is important to take a step back and think about why you bought or sold something in the first place.

Selloffs are normal: I have written about this at length recently. It seems that with the current market conditions we have seen, people forget that selloffs happen a lot and they are normal and healthy for the market. Historically speaking a pullback of 5% happens 3 times per year on average and a 10% correction happens approximately once per year. Further, we can expect to see a 20% correction around every 3.5 years. As you can see, this kind of volatility should be expected and should not be a cause of panic selling. The patient investor will use these market pullbacks as a time to buy quality stocks at a discount. They won’t react with panic and make an emotional, fear based decision.

A fisherman understands these tenants. They understand that they can’t always predict where the fish are going to be, when they will be biting or what the weather is going to be but they know that if they keep their line in the water for long enough they will eventually catch something. They know that patience will eventually pay off. The seas may get rough along the way and may even scare other fisherman away but that just leaves more fish for them.  If the seas are too volatile for them to stomach than maybe they shouldn’t have been fishing there in the first place.

So what does this all mean for your investment plan? Unless you plan to trade in the markets every day, patience can be your strongest ally.  The ability to take a step back from your portfolio and assess it with a wider lens prevents you from getting caught up in the day to day or week to week market volatility and the news and opinions that come along with it. Being patient allows you to weather the downswings so you don’t miss out on the recovery or another upswing. It also allows you to make more disciplined investment decisions that aren’t driven by fear or greed.

We all don’t have an infinite time frame for our portfolios. If we did, we could withstand any market turmoil. But since we all have goals, dreams, and aspirations for our money, it is important to be as patient as possible with our investment decisions.  We should let our long term investment and financial plan be the driving force behind the major changes we make in our portfolios and not let short-term noise dictate our allocations.  If you or your goals can’t afford a short-term pullback in your portfolio than you shouldn’t be taking on the level of risk you are taking and should just stay out of the water.

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