The virtues of being patient
WHEN IT COMES TO MANAGING OUR INVESTMENTS, NOT BEING ABLE TO DO MUCH IS OFTEN AN ADVANTAGE
LIQUIDITY IS generally considered to be a highly desirable quality of investments, specially for stocks, equity mutual funds, and others where the quality of the investment can change rapidly.
However, could this ability to get out of an investment be actually be a disadvantage? If you buy into such an investment, and something goes wrong with it, then you need to get out fast. If you are locked into an investment for some reason, then that could be a disaster.
That’s one of the reasons that investments advisors always recommend open-ended funds, and the regulator tries to ensure that even closed-end funds have some kind of an early exit route.
On investment websites and in the media too, there’s a lot of about identifying and getting out of investments that are no longer good enough to be held. However, it’s easy to observe that most of the people who have made great returns over long periods have stayed invested for long periods of time, even if the investments are not that great.
At Value Research, we have recently done some studies and then a series of profiles of investors who have had great results from equity mutual fund investing over long periods. Of the things that stand out are no one had a perfect portfolio, and everyone made some mistakes. What paid off was persistence and patience. What also pays off is having money in investments that have poor liquidity, such as retirement accounts.
Supporting this inaction theory is an amusing story on Bloomberg from the US. Apparently, Fidelity Investments did a study on what types of customer accounts with them had the best returns. The results were interesting.
The best performing accounts were those which the investors had forgotten about. The investments were just lying there for years. In fact, a good number of these clients were actually dead. I’m not suggesting that dying is a good investment strategy, but emulating dead investors might just be.