INSIGHTS

On March 11, 2011

Equity Markets: Is Patience a Virtue?

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Growing up, I can remember many sayings my father used to recite (some I probably shouldn’t repeat here). One near the top of his list was, “Patience is a virtue, but I want it now.” The oxymoronic nature of that saying always bothered me a bit; however, as I look to how to become a better investor, it makes me realize that there are times to be both patient and impatient. As an example, let’s take a look at the last two years.

It may be hard for many to believe, but the bull market turned two this week (3/9/11) and as it was hitting a nadir (3/9/09), there was very little talk that it was a good time to enter the equity markets. Many strategists said to be patient as there would surely be a better entering point down the road. Unfortunately, that better entry point never came and many investors remained on the sidelines waiting. We think it is true that investors who expect long term success in the equity markets are going to have to exercise a very patient approach as they watch their trees grow; however, if they are just as patient waiting to plant those trees there is a high likelihood that they will miss a good portion of any bull market.

Given this, we think investors should exercise at least two different approaches when entering the equity markets. One is systematic and is known as dollar cost averaging. It involves putting a predetermined amount of money into the equity markets at a predetermined date based on a set time interval. Those intervals could be weekly, monthly or quarterly to name a few. By employing this strategy, investors remove a good deal of emotion from investing and also one of their biggest hurdles to success - themselves. The second approach involves taking advantage of the volatility of the markets, but it can be more difficult, time consuming and frustrating to implement.

We have discussed before how even in the midst of a bull market we expect corrections from time to time. Specifically, we expect, on average, a 3% pullback in the S&P 500 every 90 days. Clearly it would be wise for investors to wait for one of these pullbacks; however, one never knows for sure exactly when they will begin, how deep they will go and when they will end. The good news for investors who have been patiently waiting for a correction is the S&P 500 is now 3.57% off of its recent high (2/18/11 - 3/10/11). Could the correction go deeper? Definitely, and we would actually like to see it do so; however, we freely admit we don’t know for sure. Something we are more comfortable forecasting is where the U.S. equity markets will be a year from now, and simply put, we believe they will be higher. Given this, we continue to encourage investors to systematically add to their equity investments as well as take advantage of the normal corrections as they occur. Although, don’t be too patient waiting for the perfect opportunity as they don’t occur very often and they are pretty tough to spot in real time.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the disclosures webpage for additional risk information. For additional commentary or financial resources, please visit www.aamlive.com/blog.