Patience can be defined as the capacity to accept or tolerate delay, trouble, or suffering without getting angry or upset. It’s the ability to endure difficult circumstances, persevere in the face of adversity, or wait calmly for the achievement of a goal.
Patience pays off when investing.
Patience is also hard.
Variability of Returns
Let’s use the S&P 500 and Russell 2000 indices as examples. It’s been two years since investors in the S&P 500 have seen positive gains. It’s been even more frustrating with small caps, with the Russell being at or close to the same level it was trading at back in November 2020. So, depending on what you’re invested in, you may be looking at 2 to 3 years of dead money.
It’s tempting to toss in the towel and lock in the 5% that short-term treasuries are paying, and that could be a good or bad decision, but for long-term money earmarked toward growth I’d argue that type of decision has the ability to detract from returns more than enhance them.
When we are in periods like this, it’s important for investors to take a longer-term view and not let recency bias and short-termism impact their decisions.
The table below shows the rolling returns for the S&P 500 going back to 1994. On average, the S&P has produced a 10.3% annual return over rolling three-year periods, a 9.2% return over rolling five-year periods, and an 8.2% return over rolling seven-year periods. But these are averages, and investors can sometimes get lucky and invest when the returns are much higher (i.e., the High column) or much lower (i.e., the Low column). Take the worst-case ten-year period in which an investor who bought the S&P 500 may have had to endure a decade of losing money.
| Roll Period | Average (Median) | Best | Worst |
| 1 year | 10.62% | 160.57% | -467.84% |
| 3 years | 9.89% | 42.43% | -42.65% |
| 5 years | 9.72% | 35.15% | -17.97% |
| 7 years | 9.02% | 25.75% | -7.76% |
| 10 years | 8.57% | 21.28% | -5.38% |
| 15 years | 8.32% | 19.24% | -0.72% |
| 20 years | 7.95% | 17.90% | 1.60% |
Source: The Lazy Portfolio ETF : Rolling Returns
This chart below presents this concept visually as well. This shows the five-year rolling returns of the S&P. As you may suspect, in the 1930s, early 1980s and during the 2000s, the rolling returns were below average and even negative, but after the market bottomed in these periods the rolling returns improved significantly.
5 Years Annualized Rolling Returns over time
Source: The Lazy Portfolio ETF : Rolling Returns
“Forget About It”
Based on my experience in working with many different types of investors at different life stages, I can tell you a few things.
Most can’t (or won’t) be able to handle three years of poor returns and if you expand it to five years, forget about it! But there are some ways to better try and position a portfolio and investments for these poor performing periods: some of it is tactical, some of it is mental and some of it is historical.
Diversify Smartly: Shield your investments by spreading them across multiple assets and markets. Think beyond just stocks (or U.S. stocks) – incorporate bonds, international equities, alternatives and more to safeguard your portfolio against market volatility and long periods of lackluster returns that may shake you out of solid assets. We recently tackled the importance of diversification on this podcast episode.
Enduring Active Strategies: Understand that with strategies like value investing or other active investment strategies like factor investing approaches, deviations from benchmark returns are expected. Be prepared for these variances and ensure they align with your investment goals.
Understand History & Market Returns: Some of the very best returns come after periods of declines. This is one the areas where patience really pays off. If you invest in the market or investment strategies and you see losses on your investments, the key is not getting shaken out. By the time the losses are material, that likely means the worst of the downturn it is probably already behind you. In a recent discussion with value investor Steve Romick we had on our Excess Returns podcast, he explains how he approached investing during the COVID crash and what he has learned in investing over time.
Take the Long-Term View: Markets will fluctuate; it’s their nature. By keeping a long-term perspective, you can see beyond temporary downturns and focus on the broader horizon of growth opportunities and letting your money and wealth compound over time.
As Warren Buffett once said, “The stock market is a device to transfer money from the ‘impatient’ to the ‘patient’.”
I couldn’t agree more.
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Originally Posted October 4, 2023 – The Long Game: Why Patience and Perspective Matter in Investing
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