Buying shares might be a spontaneous act for some investors, but selling them shouldn’t be.
If you want to follow the ‘passive investing approach’, then it’s likely that you understand that buying shares and holding them for the long term is the only way to be sure that your personal return will be close to the average market return.
The problem is, while buying shares is a bit thrilling and can provide a real ‘rush’, holding onto the pieces of paper for years afterwards is not quite as exciting. But why is the ‘holding’ so important?
Why does it pay to be a patient investor
Ultimately, it pays to be a patient investor, because the primary source of investing returns comes over the long term.
While sharp jumps in share prices may frequently make it into headlines, this is really the exception rather than the rule. Over a large and diversified portfolio, these success stories will be offset (at least partially) by disasters, meaning that your overall return is really the ‘moderate success’ of the overall basket of shares as a whole.
In which case, you may start to be putting together the picture of why you need to hold investments for a long period. On average, returns ‘per day’ from shares is actually very low. You can only hope to achieve the annual returns of 5% – 7% often quoted in educational resources if you hold the shares for a full year.
Dividends are a reward for patience
Dividend income is the share of profits which management pay to shareholders as a reward for holding their shares.
The dividends are usually paid once per year, half year or quarter. However if you buy shares immediately before they pay out, this won’t yield a quick profit. This is because as the dividend date draws near, the expected payout begins to slowly inflate the price of the share. Therefore anyone buying the share a week before the payout deadline would in effect be ‘overpaying’ for the share, and the receipt of the dividend would merely compensate them for the premium they have paid.
How to be patient as an investor
There are several things you can do to improve your patience as an investor.
- Don’t track the stock market on a daily basis. There’s simply no point in obsessively tracking the stock market indices or checking the value of your stockbroker account, as you don’t want to be ‘triggered’ into selling anyway.
- Don’t get sucked into debates about whether the stock market is ‘over/undervalued right now’ as such arguments only lead to a buy or sell signal which will disrupt your original investment plan.
It might not sound as interested as sitting at a desk with 3 monitors flicking away with green and red flashing symbols and price charts, but silently and patiently holding onto your shares over the long term has been proven to be a reliable way of holding shares which has worked for generations.
Therefore take a leaf out of the book of patience next time you open your stockbroker account!