The Importance of Patience in Investing: How to Survive the Market Volatility
Investing is often described as an exciting process that can potentially be profitable. However, it is important that the investors realize that there is no such thing as a straight road to wealth. The financial markets are well known for having short term fluctuations that can have a big effect on investment prices. This article explores the importance of the concept of time in investing and how it can assist investors in managing risk during market volatility.
What is Mean by Short Term Volatility?
First, it is important to define what is meant by short-term volatility in the context of this discussion. It is the sudden and large price movements that can happen in the financial markets within a relatively short period. Such changes may be brought about by economic data, political events, or changes in the attitude of the market participants. Despite the fact that such volatility can open up possibilities for high returns, it also poses a risk of large losses if not managed properly.
The Importance of Patience in Investing
Patience is not always appreciated in the contemporary financial world where investment decisions are made frequently. However, it is a valuable asset that can significantly influence the investment returns. Here are a few key reasons why patience is crucial:
- Preventing Decision Making Based on Emotions: Volatility is most likely to elicit an emotional response of fear or greed from investors. These feelings may result in decisions that are not well thought out and may end up costing investors money. Thus, patience can help investors avoid making hurried decisions influenced by the short-term market movements and instead focus on their financial goals.
- Taking Advantage of the Market Mistakes: Volatility usually collides with market inefficiencies where the prices of assets deviate from their fundamental value. Patient investors can take advantage of such situations by buying low-cost assets or selling expensive ones. Waiting for the market to correct itself gives investors a better chance of getting higher returns.
- The Importance of Compounding Returns: Patience is important for those who want to gain from the power of compound growth. Compounding is the process where investment earnings are reinvested to generate further earnings. The longer an investor holds their assets, the more pronounced the effect of compounded returns in the growth of the investment.
- Managing Market Risk: It is a fact that the market always experiences fluctuations. Patience can help investors ride out these storms without panicking and making costly decisions. History reveals that markets tend to recover from dips and those who wait for the storm to pass are usually handsomely rewarded.
Case Study: Warren Buffett
Major investors, such as Warren Buffett, are the embodiment of the importance of patience in investing. His approach to long-term investment and absence of panic during market movements are reminiscent of his approach. During the financial crisis of 2008 when the majority of investors were panic-stricken and trying to sell their assets, Buffett took the opportunity to purchase shares in companies like Goldman Sachs and Bank of America which turned out to be very profitable in the future.
He once stated that the stock market is a device through which the needy that is the impatient will pay their money to the lucky that is the patient. This shows his investing approach.
Tips for Practice of Patience
The problem is that patience is hard to come by, especially in the world of investing. Here are some tips to help investors develop patience:
- Set Your Investment Goals: This can help investors maintain their focus on the future instead of being influenced by the short-term movements of the market.
- Divide Your Portfolio: Investing across different sectors helps to reduce the effects of volatility, which is useful in keeping the investor calm during the downturns.
- Monitor the Market but Do Not Overreact: It is crucial to know what is happening in the market, but it is equally important not to react to every piece of news. This way, investors can develop patience by not overreacting to whatever is happening in the market.
- Seek the Advice of Professionals: Working with a financial advisor provides important guidance that keeps investors calm during the stormy market periods. Advisors are trained to assist with keeping the focus on the long-term goals which can be very reassuring in the face of loss.
Conclusion
In investing, patience is not just a norm, it is a way of surviving the highs and lows that are inevitable in the market. Those who work on their patience can avoid the emotional traps, take advantage of the market mistakes, benefit from the power of compound growth, and navigate the market with confidence. Warren Buffett’s successes are a clear example of the effectiveness of patience in business and other financial activities. This way, investors can ensure that they practice patience and increase their chances of getting high returns in the long run.
