Equity investors are often told to “buy and hold”, but we have mentioned before that that is not the whole truth and that slow but deliberate adjustments to your investment portfolio are necessary to optimize the return you get and manage the risk you take. Although equities are the best-performing asset class over the longer term (see graph below) and a buy-and-hold strategy will eventually work if you just buy the index, you will notice that there are times when you have to wait for a very long time to go forward.
There are also times when longer-term structural shifts will give you a clear indication of potential problems in a specific region or sector and indicate that moving to another area of the market is a good idea (see graph below of time before and after 2012).
There is a very desirable personality trait common to successful investors, namely patience, but not everyone has it. You will most likely never enter or exit an investment at precisely the right moment. If you prefer instant gratification, you would like to see your investment grow from the start and you will tend to look at your neighbour’s investment and try to do better.
In 1972, psychologist Walter Mischel, a professor at Stanford University, put a group of children of between 3 and 5 years old in a room with a delicious marshmallow for each on a table. Before the researchers left the room for fifteen minutes, they told the children they had two choices: they could either eat the marshmallow or wait until the researchers returned. If they managed to resist the temptation, they would receive a reward of a second marshmallow. The findings were fascinating, with some eating the marshmallow immediately while others were able to wait. The researchers then tracked the two groups, the “eaters” and the “waiters”, for years and found those who had been able to delay gratification enjoyed much greater success regarding educational attainment, body mass index and other life measures.
We are born with a fairly fixed personality but we can develop habits. Even if your personality shows an overwhelming preference for instant gratification, you can still – with some effort and the help of an independent financial advisor – develop the habit of patience when it comes to investment.
In conclusion, it is important to understand that we are living in a rapidly changing world and that something you buy today will probably be obsolete a few years from now. We believe that replacing the mentality of buy-and-hold as regards your portfolio with one of being “assertively dynamic”, you will be protected from both yourself and the accelerated rate of change in our investment world.