How much time do you give your investments to grow before making changes to your portfolio? According to recent studies, the average holding period on equity based mutual funds is just over 3 years. Why so short? My guess is that most investors are impatient and seek growth and returns first before giving their account the necessary time to grow. Media and attention-grabbing headlines continue to put a focus on the here and now. All of this creates deafening noise that shifts attention away from the most important element when investing, time.
A farmer would never walk the fields pulling up small sprouts only to confirm the roots are in fact growing. No, the farmer makes sure the future crops get water and time so they may be harvested when ready. Investors could increase their real life returns by taking a similar approach as opposed to timing or trading their way to more. Selling early and often will not build and sustain the wealth necessary to generate your future retirement income. How can one become more patient with what they own and stay the course with their current investment selection?
I believe this starts with having a purpose and plan for your investments before a dollar leaves your account to be invested. Investing without purpose puts the emphasis on outcomes. When you don’t have a job description for your investments the default setting becomes more is better. That’s unfortunate, as time is one of the best kept secrets successful investors recognize and embrace in growing their wealth.
Consider this, Warren Buffett, one of the most successful investors of our time has a net worth approaching $85 billion. Did you know that 96% of his net worth arrived after his 65th birthday? That’s over $81 billion of wealth created in the past 25 years! Currently age 90 and going strong, he continues to search for investments while remaining patient and optimistic on tomorrow. I’m not a genius, but this approach of utilizing time appeals to me in its simplicity. It’s important to recognize the enormous gap between simplicity and ease of execution. Rarely does sitting still feel good when markets are contracting or expanding to new highs (now). Sit still by yourself may be near impossible, that’s ok and why we’re here.
Having a financial professional to coach you through market ups and downs makes a lot of sense (clearly, I’m biased but hear me out). Having a voice of reason to keep you focused on the long term and your unique plan is the key value proposition in a relationship together. Your plan should be detailed and built on the foundation of what you want. Short term goals, long term goals, super stretch goals, they all matter and all add up. Equally important is spending what you have along the way in ways that make you happy. A thoughtful and diligent planner will ask you questions so you may get really clear on goals and prioritize them based on time and current consumption. Only after you have transparency on what you want, and the time associated with these goals should you proceed to invest what you have. Many have this process backwards or believe outcomes are of the utmost importance, there not.
Here’s a 3-step process that may assist you in gaining goal clarity.
- First, update your balance sheet including all that you own and owe.
- Second, next to each asset and liability provide a purpose and job description based on what you most want to accomplish. Consider timing and first use with cash and investments when completing this step.
- Third, direct the right monies to the right account via automation so that you are taking steps to get closer to what’s most important to you. Reflect on your progress periodically.
It’s important to remember that if your goals have not changed, it’s likely that your portfolio doesn’t need to change either. When you frame your financial house in this perspective, you apply process to your decisions and take advantage of what time offers in financial planning.