A fully flexible way to invest
The legendary investor Warren Buffett is attributed with saying, “I often make more money when I am snoozing than when I am active.” So how can snoozing lead to better investment outcomes?
The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change and their effects on you will depend on your individual circumstances.
The answer may lie in patience, or rather the lack of it, and the important role it plays in determining investment returns over the long-term.
The patient investor (who one might refer to as a snoozer) is likely to set up a long-term buy and hold strategy, while the impatient investor will seek more immediate investment returns – potentially by trading more frequently or backing their investment skill to help them move to the best investments.
Such impatience can however lead to higher transaction costs, the wrong decisions at the wrong time, and lack of diversification. Despite this, how many investors are interested in snoozing? Apparently, not many – or at least less and less as time goes on.
This tax year 2023-24, you can put up to £20,000 into tax-efficient ISAs. If you don’t use this year’s allowance by the end of the tax year on 5 April 2024, it’ll be gone for good once the new tax year starts on 6 April. It seems like this may be the case. The daily volume of information we receive is ever increasing, and at greater speeds. Timelines are being compressed. There are greater expectations for immediate results. And this is reflected in our careers, Generation X have established a pattern of being loyal to their career choices but move more frequently among employers than the Baby Boomers who came before them.
This trend appears to playing out in investment markets, with Andrew Haldane, Chief Economist at the Bank of England, in recent years showing evidence for:1
Impatience seems to be dominating our collective investing behaviours. This may be due to the increased information available on markets and individual companies. Perhaps also, those markets are more liquid and dealing charges are much lower. The market frictions which may have enforced more patience appear to be removed and the option for seeking instant gratification from your investments now exists.
However, the instant gratification you may feel from making adjustments to your portfolio in response to short-term events could have both financial and emotional costs.
One of the classic results in behavioural finance suggests that investors who trade more frequently, on average, earn lower returns. Transaction fees can erode returns over time, and returns may also be affected by poor market timing – investors have a disposition to hold losing positions longer than winning positions. Do this repeatedly and you may end up with a portfolio of losers. Additionally, selling out and therefore failing to be fully invested in the market may mean missing out on potential long-term gains.
However, this portfolio repositioning may actually increase your discomfort, because simply looking at a portfolio more often ensures you will see losses more often. When checking a portfolio daily, the chance of seeing a loss from the day before is close to 50-50. By decreasing the frequency of monitoring, the comforting emotional boost of seeing a gain over time becomes more likely.
Being aware and prepared for market events which may bring about your impatient side is not enough to stop the effects being felt. It’s important to plan for how you may react during a stock market tumble, to limit its damage. In investing, market cycles are as inevitable as the changing seasons, and we should be prepared to weather them.
On top of having a long-term investing strategy it is useful to practice good habits such as reducing the frequency of monitoring your portfolio. Filtering out short-term noise often created by markets and political events can be a way of making this easier - the availability of bad news and doomsday predictions can very quickly instil a sense that markets are doing far worse than they really are, affecting your long-term perspective.
Maintaining rainy day savings can also help you control your circumstances and help prevent you being forced to sell out at the wrong time to fund any unexpected events elsewhere in your life. This protects you from reacting where snoozing would be the wiser action.
In our experience, it is time invested in the market, and not market timing, which is the greatest contributor to long term performance. Snoozing really can be a productive pursuit. However, you still need to remember that whatever approach you take to them, investments can fall in value as well as rise and you may get back less than you invest.
The value of investments can fall as well as rise. You may get back less than you invest.
A fully flexible way to invest
You must learn the art of patience if you want to give your investments the best chance of earning a return. By committing to long-term investments, you give your money the greatest chance to grow. In this section, we take a look at some slightly more advanced strategies to help you stay invested and manage your portfolio's performance.
If you’re new to investing, knowing where to start can be a daunting task. Here, we guide you through your investment journey, from what to consider before you start, the different types of investment account, which might suit you, and the various asset classes. You’ll also learn why it’s important to focus on the long-term as an investor, and create a diversified portfolio which includes a range of different investments.