Perspective, patience needed when investing

By Byron R. Moore, CFP©
Published in The News-Star
October 30, 2004

Question: It seems like we cannot win for losing in the stock market. Three out of the past four years have been lousy and this one also looks like a dud. Now the price of oil looks like it will keep things permanently depressed. Why should anyone invest in this stock market when things are so unpredictable?

Answer: Because you don't want to work the rest of your life? Because you may not be able to work the rest of your life?

Those are two possibilities.

You really shouldn't invest in the stock market unless you have to. And the only people who have to are those who don't have enough money.

And what is "enough money?"

You have "enough money" to not invest if you can put all your money in a 100% safe cash repository (bank, S&L, Treasury bills) and live off the interest and have plenty of leftovers. So if you live on $3,000 per month, you'll need about $2,000,000 in the bank to get you started. But if you take inflation and taxes into consideration, I'd suggest you need $3,000,000.

Well, that bit of financial wizardry takes care of about 2% of us.

The rest of us must face the hard fact that we do not presently have enough money to let our money be lazy. It has to work for us.

So if you don't own your own business or a lot of rental real estate, that means you need to participate in the financial markets to get ahead.

To do so, you'll need to give up one thing and pick up two things.

The first thing you must pick up is perspective. Perspective is the ability to see things in their proper context.

The stock market is made up of companies owned and run by human beings. These human beings are trying to succeed in their chosen field. In the short run, some will fail. And if they fail enough times, the markets will not reward them with additional capital -- the company will fold.

Those companies that do succeed will be rewarded with more capital, with which to go out and succeed some more. Rather Darwinian, wouldn't you say?

How has that played out in real life? Since 1928, the stock market has averaged 10%. Over the last twenty years, the average has been 12%. During the past ten years, it has averaged 11%.

Markets tend to be unpredictable in the short term and tend to be unstoppable in the long term. That's the perspective you need.

The second thing needed is patience. This process does not always occur instantly. Often times, it can take the market years to work through a cycle. Because of a lack of perspective and patience, many investors get off the train too soon to realize any significant profits from their investments. Typically, the kind of patience called for to see highly reliable results is five or more years.

If perspective and patience are the needed ingredients, there is something else you're going to have to let go of -- your demand for predictability.

The markets are maddeningly unpredictable over the short term. That's why banks have so much money. The high price you pay for such predictability is low relative earning power off of your savings dollars.

Every month you can open up your bank statement and see how your interest (however small) has grown. It is predictable.

Not so with your investment account. One month it may be up, the next month it may be down. Perhaps the only sane way to review the progress of your investment account is on year-to-year growth. Even this may be too short-term, but it will get you away from an illogical focus on the present.

Perspective and patience are not easy virtues to acquire.

And predictability is a dear vice to give up.

But the truth is that most of us will need to gain the two, and lose the one, in order to come out where we all want to be -- on top.