Patience Still Pays

“Beware of endeavoring to become a great man in a hurry. One such attempt in ten thousand may succeed. These are fearful odds.”
– Benjamin Disraeli – former Prime Minister of England

Patience has got to be the most talked about, least practiced virtue in investing.

These days, the arch of technological progress has allowed us all to be impatient at almost every level.  Instant streaming services, social network access, Amazon’s next day delivery, and the nearly instant spread of information makes the human mind expect immediacy in almost every area of life.

Of course, the same was bound to be true for investing.

The latest, most egregious example of investment impatience has to be the new trading app, Robinhood.

It’s an app designed to allow (read: encourage) people to day-trade stocks, options, cryptocurrencies, etc.  When you open it, the app lights up like Christmas.  Robinhood was literally built to nudge users to take on more risks, egging them on to try to make more money, faster.  It was designed with all sorts of clever ways to keep users on the platform, constantly trading.

Robinhood is the antithesis of disciplined, patient investing but it’s added 3 Million users during the Covid lockdowns.  I guess impatience pays (at least it pays the creators of Robinhood).

Recently, the stock prices on companies like Tesla have skyrocketed.  The “Fear of Missing Out (FOMO)” on this kind of growth has led “investors” of all ages to buy up these stocks so they can participate in the wave.  Five tech companies now constitute over 24% of the S&P 500 Index.  And all of this has happened in the span of half a year.

When you are constantly hit with stories of overnight millionaires, and countless “how to get rich” videos all over YouTube, Twitter, Facebook, Google, etc., it’s easy to feel the need to jump into trading platforms like Robin Hood and start buying speculative stocks.  Everything about these platforms and their tools are designed to profit from that impulse.

Patient investing is hard.  But remember, when you invest in stocks, you’re buying businesses.  Not trading cards.  Nothing important in a business changes every 15 minutes.  It can be boring, but it’s still the best, most reliable, path to build wealth for the long run.

Play the Long Game

Building real wealth is the ultimate long game.  The financial author, Nick Murray, compares it to planting an oak tree.  You plant the acorn, give it the sunshine, water, and time it needs to grow, and it can become something incredible.  But if you dig it up every six months (or, in the case of Robinhood, every six seconds!) to check on its progress, or make adjustments with no guiding principles, you run the risk of damaging the tree.

The compound nature of investing means the overwhelming majority of the return in any long-term investment comes in the last few years.

If you invest $500/mo. at a 7% return, you will have:

• • $86,000 after 10 years
  • $1.3 million after 40 years

Compare those results to the contributions you would have made:

• • $60,000 of contributions after 10 years
  • $240,000 of contributions after 40 years

Think about that – after a decade of contributing $500/mo., you would have deposited $60,000 and only earned $26,000 of return, or investment gain.  After ten years of diligent saving!  Only 30% of your account balance is earnings.  The rest is money you put in (and, just as importantly, didn’t take out).  That doesn’t feel like a lot of progress after ten years.

But if you stick with it for 40 years, you would have deposited $240,000 and would have earned $1,060,000 in return.  82% of your account balance is growth on the money you’ve deposited!  Only 18% of the account balance is from your deposits!  And all of this assumes you never got a raise or increased your savings rate in any way, which isn’t likely over the course of 40 years.

These results are possible, but only if you stick with saving and investing year after year and decade after decade.  They are only possible if you avoid the fads and irrational fears so many people fall victim to.

Successful investors are patient investors.  Are you one of them?

We explore the topic of patience and more in our new 9-Email Course: Foundations of Financial Success.  Sign up here for free!