Being a Patient Investor Is Worth the Wait

08/25/2015 7:00 am EST

Focus: STRATEGIES

Matt McCall

Founder and President, Penn Financial Group

When the stock market drops or when stocks surge to new highs over a few days, there is a sense of urgency for investors to do something, but Matt McCall, of Penn Financial Group, thinks it is almost certain that making any type of investment decision when emotions are high will result in a negative outcome.

When the stock market makes a big move over the span of a few days, the normal reaction from investors is to do something and quickly.

This is the case when the stock market drops as it has the last week as well as when stocks surge to new highs. There is a sense of urgency in both situations that if some type of move is not made, it will result in dire consequences. When in reality, it is almost certain that making any type of investment decision when emotions are high will result in a negative outcome.

When the stock market surges to a new all-time high—and the media is throwing it in your face 24/7—there is a normal instinct to want to join the party. If you do not get on the party bus right now, you will miss it forever as everyone else becomes wealthy. It may feel good to buy stocks when they are hitting new highs, but this strategy is not the best because no stock goes up every day. Using the pullbacks—when everyone is talking about the latest reality show and not the stock market—is the ideal time to buy into the stock market.

On the flip side is the panic investors feel when the stock market is falling off a cliff and the media is hyping it to be the next great recession. Again, it is normal to have the impulse to do something—anything—with your portfolio. The easiest move would be to sell so you do not have to watch the value of the portfolio fall any further. The thoughts of 1987, 2000, 2007 all start to pop into your head and the fear of losing it all takes over your brain.

If you are a long-term investor and have at least five years until you need to remove all the money in the portfolio, the best approach is to stick with the current strategy. And for the long-term investor that is able to sleep at night during normal market pullbacks, the even better strategy is to buy the dips. This strategy can be referred to as dollar-cost averaging because the average cost of what you paid for exposure to the stock market has been lowered by purchasing more shares on the dips.

This needs to be put into context via numbers for the investors who refuse to think over the long-term. Over the last 35 years, the S&P 500 (SPX) (SPY) has finished with annual gains 27 times or 77.1% of the time. The average intra-year drop over that time frame is 14.2%. In simple terms, the average pullback the stock market experiences during each calendar year is 14.2% from the high. As of Monday, the S&P 500 is 7.5% from its all time high set earlier this year.

In conclusion, the need to do something in the next couple of days is a normal human reaction. The ability to be patient and not do something is not easy and will separate you from the unsuccessful long-term investors. And, if you are able to look at the long-term picture and have the stomach to buy into the recent dip...congrats.

Matt McCall, Founder and President, Penn Financial Group

Related Articles on STRATEGIES