Staying invested takes patience, not constant action
At work or in life, we’re always observed, measured and even rewarded for activity, movement particularly if it’s positive i.e., progress, growth. We celebrate movement, visible effort and above all growth. The person who takes an initiative, the professional who keeps moving, and the investor who actively manages a portfolio are perceived as more productive than those who remain still. So, we usually associate activity with progress and that growth happens only with activity.
But does it? Pose this to an athlete, bodybuilder, or even a scientist. The answer might be quite different. They understand any meaningful progress is rare and not result of a single burst of activity. They mention about consistency and may be an incremental small gain over a long period. It comes from repetition, patience and sustenance over time. There’re phases when to – be active, -introspect, -recover and -reorganize.
Reflecting on our own development, particularly as a newborn, we don’t acquire the ability to recognize colors, communicate, walk or understand the world. These abilities emerge gradually. The first responses to sounds, colors and tastes, the transition from gurgling to babbling and eventually to language, and the journey from crawling to walking through the stumbles happens over months and years. What progress looks like insignificant in those initial years shows an extraordinary transformation over a few years.
While we accept this naturally as we understand the timelines we go through, we behave differently with money and investing even where the timelines are defined. We forget that during those developing years, the child had to go through multiple travails of ill-health, injuries, etc. but over years the child recovers, transforms and gets in shape to be an adult. The initial stutters, the fumbling walk, etc. don’t define what we become into adults but they’re certainly the reason why we’re what we are. And when similar things happen to our investment, we feel a punch in the gut with each bout of volatility whacking our confidence, questioning our premises.
The very money that was invested didn’t turn up overnight; it’s typically earned over a period. Patiently saved and then parted for an investment. When money enters the market, our expectations change drastically. We aspire visible progress, preferably to see our investments grow every day, week, month and year. A stagnant portfolio is a sour pill to land on our tongue, making us anxious and uncomfortable, despite knowing why it’s happening.
This drives us to make decisions which will be counterproductive our own goals. We end up switching to those investments which seem to be alive to these instances only to find they undergo a similar cycle later. If we were to constantly switch between the investments in pursuit of returns, then how do we allow the returns to accrue. It’s like sowing a seed only to plough out to check its progress every day.
Of course, markets don’t follow a reasonably predictable child’s developmental path. Markets and thus investment returns are subjected market risks i.e., those reasons that are beyond our control. Risks include changes in interest rates, economic cycles, business challenges, technological disruptions, regulatory, and government policies. Many of these trigger the ‘butterfly effects’, the results of which we couldn’t even perceive in our 2nd or 3rd order of the ripple from the original. These travel through a several layers of economic and behavioral responses. What seems obvious in the hindsight almost impossible to spot beforehand.
We know that life isn’t fair, but we do expect only good to happen to us, and all the time. We acknowledge that markets carry risk but expect our portfolio to be immune to such unpleasant outcomes. We know the returns are non-guaranteed, yet a negative return feels a personal failure and forces us as an indication to do something immediately.
When markets fall, we imagine a further and deeper correction, a permanent capital loss or jeopardizing a financial goal. Our brains are well wired to generate a list of possibilities from the current situation by extrapolating the variables that we now know or observe. So, a temporary situation turns into a starting point of an increasingly alarming set of events. Though, it’s not irrational, the problem arises when we mistake one possible future for the most plausible one, and worse, the inevitable one.
It’s difficult to envision an alternative reality to the current, it requires greater effort, displaying stoic, at times detached and with rational observation. That’s a tough exercise for any individual. The reflexive nature in our DNA to shoot or scoot makes us restless for action. We’re tempted to act not because the evidence points out to, but action provides a temporary relief from uncertainty. Action gives us a sense of agency and makes us feel influencing the events than merely enduring them.
May be in many areas of life, this instinct of action could serve well. If we find a leak, we fix it. If skill is inadequate, we practice or train. But financial markets present a different challenge. They don’t follow a predictable path, and our actions can’t influence them, so frequent changes don’t automatically guarantee better outcomes. Though, there’re instances where such actions are justified like those when the fundamentals digress, a flawed asset allocation or a readjustment due to changes in goals or approaching the goal.
The major distinction here is that acting because the circumstances have changed versus emotions are changed. In a world where speed, responsiveness and constant engagementis celebrated, investing is where additional activity or an intervention could diminish or undermine the outcome.Patience thus becomes the most underrated skill in investing. The money we invest represent our years of effort and sacrifice. It deserves a process built on the same qualities that helped us to accumulate it.Hence, the real challenge is not learning how to act when markets move but to learning when NOT to act. In life or investing, sometimes it’s the consequences of having done the right things already and having the courage and patience to not undo them.
The author is a partner with “Wealocity Analytics”, a SEBI registered Research Analyst and could be reached at info@wealocityanalytics.com