2024 was an exciting year for investors. It was the second consecutive year for double-digit returns in most of the equity markets – it didn't matter what you owned: Large, mid, small, or all. They all did well.
During last year alone, more than 20% of all trading days ended at all-time highs [1]! That’s an average of more than one per week. Needless to say, it's easy to practice patience when the equity markets perform like that.
As fun as it has been, the problem with markets like this—if we can call consistent new all-time highs a problem—is that they tend to result in one of two scenarios for investors: They either entirely ignore all risk because they don’t want to miss out on a surging market, or they feel anxiety and stress about what’s ahead.
I've had more than a few conversations with clients over the last few months where they've wanted to increase their risk by concentrating more assets into a few areas of the markets (high-flying technology and cryptocurrency come to mind) while other clients are waiting for the bottom to drop out.
While both extremes are at opposite ends of the risk spectrum, both give clear indications that what was once patience is now becoming impatience.
Regardless of where you lie on the risk spectrum, you could start the New Year by rededicating yourself to patience.
How exactly do you do that, Lon?
We start by building a good foundation that encourages patience, that’s how.
The core of our preparation in developing a foundation for patience is understanding your total cash needs for the coming few years. This would include both the total annual income needed from your portfolio over those years and any additional lump-sum needs you may have.
Based on those needs and your risk tolerance, you/we may decide to “set aside” anywhere from 1-5 years’ worth of those cash needs so they are not subject to potential equity market volatility[2]. As you might expect, how we manage and invest these funds depends again on your specific situation and risk tolerance.
But why 1-5 years? Shouldn't we have more years of expenses set aside? Probably not.
According to history (which is the only guide one should use because history is the only place where you find facts), the longest it’s taken an investor in the S&P 500 to break even (with dividends) was five years and eight months. This strongly suggests that the temporary declines, though sometimes quite deep, are relatively short-lived.
The investing objective for those building our foundation is not to pursue growth but to minimize volatility so that they are available when you need them, regardless of what is happening in the equity markets, thus giving us patience.
In other words, patience is not something you get but build.
If patience were a picture, this would be it:
Let's resolve to build a solid foundation of patience in 2025, and that way, regardless of what befalls the equity markets this year, our patience will shine through.
Stay the course, my friends.
[1] There are approximately 250 trading days in a calendar year, and there have been 57 new all-time highs (data from Charlie Bilello) in 2024.
[3] Make no mistake that this decision involves a trade-off. Historically speaking, the less you decide to hold in equities (i.e., the larger the amount that you “set aside”), the lower your total long-term return is likely to be