Thursday, February 25, 2010

Patience is More Than a Virtue

Growing up my dad would always break out into song when my sister or I would start to whine. “Have patience, have patience, don’t be in such a hurry….” you might have heard the same song at some point in your life. He would always follow the song with a statement like “patience is a virtue”.

I’m here to tell you that when it comes to wealth, patience is more than just a virtue - it is solid gold.

In my post last week Curiosity Made the Rich Man, I wrote about some people that I have worked with and what made them successful in terms of the accumulation of financial assets. I narrowed down the traits that these clients had in common and I was able to identify two core values: Curiosity and Patience.

As important as curiosity is when it comes to money, patience is either equally important or maybe even more important.

The major finance reason to maintain high levels of patience is because of the cyclical nature of markets. We all know that the business environment has its periods of both boom and bust. But the real question is why does it matter to have patience? Carl Richards from describes the need for patience due to the “Behavior Gap”. Check out what Carl has to say about investing:

“During the last few years, you may have noticed that your returns fell short of the returns you kept reading and hearing about in the media. If so, you’re not alone. A fund’s reported return is only part of the picture. The other half, well, it’s not always pretty, and you rarely, if ever, hear it mentioned. Driven by investor behavior, the investor rate of return doesn’t always match a portfolio’s gains or losses.

Let me explain.
Your potential to earn the fund’s published return rate is based on two criteria:
1. You bought AND held the fund for the entire time.
2. You didn’t add or withdraw any money.

Sounds easy, right? The reality? Few people actually invest this way. Instead, investors chase past performance, buying funds too late (after they’ve already peaked) or selling funds too early (before they turn around).”

I love this explanation. Because investors are driven by human emotion they tend to make decisions at precisely the wrong time - hence Carl’s phrase the “Behavior Gap.” Without massive amounts of patience and self control the average person just cannot wait out losses and take advantage of gains.

Have you ever met someone who wanted something so badly that they end up becoming reckless and end up flailing around like a two year old at the grocery store who wants a toy? It’s not very productive is it?

For most of my life I was a long distance endurance swimmer. Endurance sports are different than other sports most people are familiar with, it’s all about technique, efficiency and - yep you guessed it patience.

When you watch a really talented endurance Kramerathlete it looks like they are barely trying for most of the race. Think of Sven Kramer from this year’s winter Olympics. This Dutch long track speed skating phenomenon is so efficient that it looks as though he is barely trying while he sets world records.

I can speak from experience that in reality it is all about self control, establishing sustainable pace and finishing strong.

It’s funny how easily sports analogies translate to personal finance, but it is absolutely accurate. Guys, I am here to tell you that the most financially successful people I have worked with did not get there by day trading, winning the lottery or inheritance. These folks made a decision early on to be financially independent, then they set the course and followed the path no matter what was going on around them. Oh and it helped that they were a little curious about the tools that were helping them get there.

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