It may be easy to overlook the importance of patience in investing. Instant gratification has become a way of life. We’ve been conditioned to expect instantaneous results through influences like on-demand television and one-click shopping. Many of us aren’t willing to wait more than two seconds for a website to load.1
The rapid rise of the markets hasn’t helped to nurture our investing patience. The anomaly of a pandemic, combined with unprecedented actions taken to combat it, has distorted market and economic cycles.
Last year, in just 22 days, the S&P/TSX Composite Index (TSX) forfeited almost nine years of gains, yet it took only 200 trading days to return to prior highs.2 The S&P 500 Index rebounded to previous highs in record time — just 107 trading days. Consider that over the past 40 years, it has taken an average of 380 days for the TSX to recover from just a 10 percent drop. Similarly, this past summer, it was reported that the pandemic-related recession was the shortest ever on record in the U.S. and lasted only two months.
History has also shown us that the TSX experiences a correction of at least seven percent each year, on average. Yet, for most of this year when equity markets have shown any sign of pulling back, retail investors have been quick to buy the dip.
After a year in which markets have largely trended upwards, it may be easy to forget that advances do not always happen at a constant rate. Over 40 years, the TSX has had an average rate of return of around 6.3 percent. Yet, it’s worth pointing out how few of the annual returns fall close to this long-term average: just 20 percent of annual returns were between 5 and 10 percent, and almost one-third were negative.3 Patience, through time in the markets, helps to provide predictability in investment returns.
We have required a particular amount of patience as we fight the evolving pandemic. Recent reports have indicated a slight setback to Canada’s economic growth figures for this past spring, suggesting our road to recovery may be longer than many anticipated. Patience will still be needed: the economy has yet to normalize, largely due to an uneven reopening and the threat of the delta variant. Yet, there are also factors to suggest continued asset price support. In the U.S., higher inflation rates appear to be moderating and sustainable. And, central bankers appear to be embracing the theme of patience. While a slow taper in asset purchases may be on the horizon for both Canada and the U.S., there appears to be no threat of increasing short-term interest rates in the near term.
For most investors, the objective is to create wealth over the longer term, and not for tomorrow. As we look forward, continue to stick to the principles set out in your plan, and don’t overlook the importance of patience in achieving your longer-term investing goals.
- Akamai Technologies – 2014 Consumer Web Performance Expectations Survey
- S&P close at 2/10/20, 3/16/20, 8/10/20; TSX close at 2/20/20, 3/23/20, 1/7/21
- S&P/TSX Composite Index 10/29/80 to 4/30/21