How to stay invested diligently

One of the most compelling arguments for staying invested is the staggering cost of being on the sidelines for just a few key days.A famous study by the investment research firm Dalbar consistently shows that the average investor significantly underperforms the market average, largely due to the costly habit of jumping in and out of the market at the wrong times

In investing, few temptations are as alluring as the idea of ‘timing the market’. The concept is simple – buy stocks when they’re low and sell when they’re high. It promises maximum returns with minimal risk, a get-rich-quick scheme backed by charts, algorithms, and a dash of intuition.

But for most investors, this pursuit is a siren's song. It leads not to a treasure trove of profits, but to the rocky shores of missed opportunities, stress, and often, underperformance. The truly powerful, yet less glamorous, strategy is encapsulated in a simple principle: It's not about timing the market, but time in the market.

Imagine trying to predict the weather a year from now. Now imagine betting your life's savings on that prediction. This is the fundamental challenge of market timing. It requires you to be right twice. First when you sell, and again when you buy back in.

The emotional rollercoaster of fear and greed makes this nearly impossible. When markets plummet, fear screams "Sell before it gets worse!" When they soar, greed whispers, "Just a little higher before cashing out."

This emotional whipsaw often leads investors to buy high (during euphoria) and sell low (during panic), the exact opposite of a profitable strategy.

The magic of compounding is one’s silent financial partner. And the trick is to understand that the key in the formula lies in time and not the returns. That brings us to the greatest virtue in investing, patience.

If risk premium is the additional risk one takes to achieve a higher return, then patience premium is the additional return an investor earns for being disciplined and staying invested during volatile times. It could turn into a competitive advantage.

The patience premium isn't inaction or a passive strategy but it's an active one powered by the most potent force in finance, the compound interest.

Think of it as your money earning its own money. It’s non-linear and exponential. A simple analogy is a snowball rolling down a hill. The longer it rolls, the more snow it picks up, and the larger it grows. And the key ingredient is time.

One of the most compelling arguments for staying invested is the staggering cost of being on the sidelines for just a few key days.

A famous study by the investment research firm Dalbar consistently shows that the average investor significantly underperforms the market average, largely due to the costly habit of jumping in and out of the market at the wrong times.

Looking atthe S&P 500 over a long period, ifone had invested $10,000 in the S&P 500 and stayed fully invested from 2002 through 2021, the investment would have grown significantly.However, if one tried to time the market and missed just the 10 best days in that entire 20-year period, the total return would be cut in half. Miss the top 30 best days, and the returns would dwindle to a fraction, barely beating inflation.

The cruel irony is thatmany of the market's best days often occur within days or weeks of its worst days, typically during periods of extreme volatility and fear. By trying to avoid the downturns, one is highly likely to miss the vital recoveries.

But, embracing the patience premium requires a proactive and disciplined approach.

Craft a Long-Term Plan: Define your financial goals like retirement, a house, education, etc. and build a diversified portfolio (stocks, bonds, etc.) aligned with that timeline. This defined plan becomes an anchor in a stormy market.

Automate investments: Set up an automatic monthly or other regular contributions to investment. This strategy, known as rupee-cost averaging, removes emotion from the equation. One could buy more shares or units when prices are low and fewer when they are high, smoothing out the average purchase price over time.

Tune out the noise: The 24/7 financial news cycle thrives on drama. Headlines scream about crashes and rallies, but for a long-term investor, this is mostly static. Stick to your plan and avoid making impulsive decisions based on short-term news.

Reinvest dividends: When investing in stocks, don't just pocket the dividend payments. Reinvest them to buy more shares. This is a powerful way to accelerate thecompounding process and build wealth over decades.

Review and Rebalance:Don’treact but be proactive. Periodically (e.g., once a year) review the portfolio to ensure it still matches the target allocation. If one asset class has grown significantly, trim a portion and buy the underperforming ones to get back to the plan. This is a disciplined way of "buying low and selling high" without trying to predict the market's moves.

In conclusion, the quest to time the market is a game of chance. Earning the Patience premium is a strategy of discipline. It acknowledges that short-term volatility is the price of admission for long-term growth.Stop trying to predict the storms. Instead, focus on building a sturdy ship and sailing steadily towards your horizon. In the end, the greatest asset in your portfolio isn't a particular stock or fund but it's your patience.

(The author is a partner at Wealocity Analytics, a SEBI registered Research Analyst firm and could be reached at [email protected])