I find it ironic that the two common financial mistakes that people make are (1) not investing i.e., procrastination or (2) doing too much i.e., turning over investments, changing their mind and so on.
Of course, not doing anything is an obviously bad thing as nothing comes from nothing. I
wrote about this in March. But, sometimes reacting, changing, tinkering, selling, buying and so on can be equally as bad. The truth is that investing requires a lot of patience. The quote below from Warren Buffett’s business partner since 1975, Charlie Munger says it perfectly.
Look at those hedge funds - you think they can wait? They don't know how to wait! I have sat for years at a time with $10 to $12 million in treasuries or municipals, just waiting, waiting...As Jesse Livermore said, 'The big money is not in the buying and selling...but in the waiting.'
– Charlie Munger
When it comes to investing, doing nothing is often sometimes the most intelligent thing to do.
Research demonstrates that buying and selling destroys wealth
There’s a commonly cited story about global fund manager, Fidelity conducting
research into which investment accounts performed the best. It is said that it found that inactive accounts i.e., where the investor forgot that the account existed produced the best returns, on average.
A
study that included 66,465 investors concluded that portfolio turnover (i.e. buying and selling stocks) is inversely related to returns. That is, higher turnover leads to lower (about 5.5% p.a.) returns, on average. Whilst this study only considered stocks, the same would be true for every other asset class.
Three reasons why you need the discipline to be patient
If you have the discipline to be patient, you will enjoy much better investment returns for three reasons.
(1) Markets move in cycles
Most investment markets move in cycles. That is, a period of above-average returns follows a period of below average-returns, as shown in this
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