The Power of Patient Investing

by Manisha Thakor

Have you ever been tempted to “play the stock market” by following a hot tip, only to watch your shares plummet? Do you want to invest, but feel overwhelmed by all of your choices? How do you know if you should invest in stocks at all? As a female financial advisor, I hear these questions a lot.

Here’s a powerful, yet simple guideline I personally love: Don’t put money in stocks unless you can afford to leave it there for at least 5 years – and ideally as long as 10 years.

What’s the rationale behind this time frame?

The short answer is that it dramatically increases the odds that you will have a positive return on your investment.

To more fully explain, let’s start with the definition of a stock. A stock is a piece of ownership in a business. If you buy a share of that business at a reasonable price, and the business prospers, over time you can expect the price of your share to go up with the business’ earnings.  The problem is that this relationship is not perfectly linear. In the short run, human emotions like greed and fear are the primary drivers of stock prices. In contrast, over the long term (defined as a 10-year plus period), the key driver of stock prices is the earnings the company is generating.

It’s not so far off from building a classic wardrobe. In any given year, you may have one or two pieces that are in style and a few pieces that are not in style, but over the long run, if you stick with the classics you can stay on track and easily adapt to new trends.

The financial version of doing this is to own a diverse basket of stocks. A common one is called the S&P 500, and represents shares of 500 large US companies such as Apple, Exxon, and General Electric.  How has the S&P 500 performed over time?

We have good stock market data back to 1926. If we were to look at rolling 5-year periods for the S&P 500, we’d find that 86% of the time, stocks generated a positive return. This means that going back to 1926, if you were invested for a five-year period, you had an 86% chance of earning a positive return. To add icing on the cake, the average return of all 5-year rolling periods was 9.8%.

Now, what happens if you stretch the time period out to 10 years?  Since 1926, rolling 10-year returns were positive 95% of the time with an average 10-year return of 10.5%. So, not only did an investor have a high likelihood of earning a positive return, it was also a strong return. But if you look at just individual calendar years, in only 72% of the years from 1926 to 2012 did stocks have a positive return.

Sure, you can trade in and out of stocks over shorter periods of time, but the odds are not in your favor. On top of this, you may incur trading and tax costs that can add up quickly, further diminishing your overall return. While past performance is never a guarantee of future returns, history suggests that a strategy of patient investing gives you a greater chance of success.

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Manisha Thakor

From Manisha's linkedin profile page:

Manisha Thakor is the Director of Wealth Strategies for Women at Buckingham Strategic Wealth and The BAM Alliance. 

Manisha and her colleagues provide both evidence-based wealth advisory services for high-net-worth households and core asset management solutions for women and families nationwide with $80,000 or more in investible assets. 

An ardent financial literacy advocate for women, Manisha is the co-author of two critically acclaimed personal finance books: ON MY OWN TWO FEET: a modern girl’s guide to personal finance and GET FINANCIALLY NAKED: how to talk money with your honey. She is on Faculty at The Omega Institute and serves as a Financial Fellow at Wellesley College. Manisha is also a member of The Wall Street Journal’s Wealth Experts Panel, a member of the 2015 CNBC Financial Advisor’s Council, and wearing her financial educator’s hat serves as a part of TIAA-CREF’s Women’s Initiative. 

Manisha's financial advice has been featured in a wide range of national media outlets including CNN, PBS, NPR, The Today Show, Rachel Ray, The New York Times, The Boston Globe, The LA Times, Real Simple, Women’s Day, Glamour, Essence, and MORE magazine.

Prior to joining the Buckingham team, Manisha spent over twenty years working in financial services. On the institutional side she worked as an analyst, portfolio manager and client relations executive at SG Warburg, Atalanta/Sosnoff Capital, Fayez Sarofim & Co., and Sands Capital Management. After this she moved to the retail side and ran her own independent registered investment advisory firm, MoneyZen Wealth Management. 

Manisha earned her MBA from Harvard Business School in 1997, her BA from Wellesley College in 1992 and is a CFA charterholder. She lives in Portland, OR where she delights in the amazing Third Wave coffee scene and stunning natural beauty of the Pacific NorthWest. Manisha’s website is MoneyZen.com.