Patience is the least glamorous skill in finance and arguably the most profitable. Consider a household that began investing a modest monthly sum twenty years ago and never panicked, even on the days when Sensex Today Live headlines screamed about sharp declines. That family probably holds a considerable corpus today, while frequent traders who reacted to every movement have little to show except brokerage statements. In discussions about market behaviour, even a reference to the DAX tends to illustrate the same lesson: indices rise over long periods despite plenty of frightening interruptions along the way.
The Quiet Power of Compounding
Compounding means that your earnings start earning their own earnings. A lump sum invested at twelve per cent annually shall be doubled every six years, and it will grow almost thirty times after thirty years. The exciting thing about compounding is that most of the returns are booked towards the end, which makes it extremely unwise to quit and take profits early. Selling after a bad quarter and re-entering the market after some time will miss the crucial period that would have made the difference between profit and loss. Time is the main ingredient for lasting wealth creation.
What Frequent Trading Costs You
Every trade comes with direct costs like brokerages, taxes and transaction fees. The most common pitfall for frequent traders is the taxation of short-term gains at a higher rate than the long-term ones. Therefore, a profit taken too early may diminish the total returns significantly. There are also indirect costs associated with frequent trading, like the anxiety of constant monitoring of the trades and making decisions in haste. An aggressive trading strategy may end up with lower returns than a simple buy and hold strategy of quality stocks and indices.
Surviving All Market Corrections
In a lifetime of trading, there are multiple market corrections that take place. India has had its share of market crashes due to financial crises, policy changes and surprises in the geopolitical space. However, the Indian market has been on a consistent growth trajectory as the economy and corporate profits grew. Patient investors who hold on to their winning stocks through such corrections benefit enormously as the returns are locked in at much higher levels. The best way to survive market crashes is to have some cash on hand in a safe place so that one should not be tempted to sell equity assets at lower prices to raise cash.
Choosing the Right Business to Survive
Patience is usually combined with the ability to choose the right business to invest in. A company with consistent earnings, low debt, credible management, and a product that is in demand regardless of the vagaries of the economy is the best bet for a patient investor. Index funds are the easiest way to practice patience in stock markets, as the risk is diversified, and one is invested in all the leading companies of the stock market. Whatever strategy one adopts, checking the portfolio on a regular basis, maybe annually or quarterly, is more beneficial than checking it daily. Constant checking tempts one to take unnecessary risks.
Building the Mindset of Patience
Patience is a virtue that can be inborn or can be learnt. Although it might seem that patience is a choice, there are strategies that one can employ to become patient. Set up automated payments to the stock market to grow at a steady pace. Set realistic goals in investing with timelines. For example, set aside a certain amount for your child’s college fees, and invest that amount with a time frame in mind. Whenever the temptation to overreact hits, walk away for at least two days. The urge shall subside, and the rational voice that wanted to wait patiently will prevail.
Conclusion
Frequent trading may be exciting, but it is extremely costly. Patient investing allows one to grow wealth multiple times over extremely long timelines. Compounding, cost-cutting, withstanding market corrections and buying the right businesses are the best ways to build wealth through patience.
