Credit Report Information 101

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Your credit history is one of the factors that lenders use to assess your creditworthiness so it is important to understand what information has been reported to your credit file. 

Ancient Greek playwright Sophocles wrote, “Wisdom outweighs any wealth.” While this statement certainly rings true, it’s also true that wisdom can play a major role in building wealth—particularly when it comes to effectively managing your finances and credit.

Consumers with excellent credit scores  tend to pay less for major purchases. In short, your credit is your financial calling card, it can both open and close doors. Credit reports have also become essential tools beyond the financial world. Nowadays, your housing or employment status could be decided by your credit history; and maybe even your love life.

Thus, it is important to be prepared for anything on your horizon by understanding how your credit and credit score can impact financial progress and wealth building. The three major credit reporting bureaus — TransUnion, Equifax and Experian — maintain credit reports. The reporting companies issue credit reports to creditors, insurers and others as permitted under law for the purposes of evaluating your financial responsibility.

Tablet - 3 Bureau Reports & Scores

Here is an example of how the system works:

Apply for a Credit Card – When you apply for a new credit card, the creditor requests a copy of your financial history, or credit report, from one or more of the credit reporting companies.

The Creditor’s Assessment – The creditor may use your credit report, a score, and other information you provide (such as income or debt information) to determine whether to approve your application and what rates to offer.

The Creditor’s Decision – If you are issued a card, the creditor reports that account to the credit reporting companies, and then updates it, including your balance and payment activity, about every 30 days.

Your Credit Profile Updated – The credit reporting companies update your credit report as they receive new information from creditors and lenders. Your credit profile changes based on your financial activity. The next time you apply for a credit card or loan, the process repeats.

Managing Your Credit Report

Your report is divided into six main sections. When you open a new account, miss a payment or move, these sections are updated with new information. These sections are:

  • Identifying Information (name, address, birth date and Social Security number)
  • Employment
  • Consumer Statement
  • Account Information
  • Public Records
  • Inquiries

Negative records – Late payments create a negative record. Generally, negative records will stay on your report for up to 7 years (up to 10 years for certain bankruptcy information). Positive records can remain on your credit report longer.

Your Credit Report is updated in most cases every 30 days – Your credit report is updated with new information reported by your creditors. Most creditors report new information approximately every 30 days, to reflect your account balances and payments you make.

Check every 6-12 months – Not all creditors report to all three companies; the companies obtain their data independently, so your credit reports from TransUnion, Equifax and Experian could substantially differ. That’s why it’s important to check your three credit reports every 6-12 months to ensure that the information is accurate and up-to-date.

Check Your Credit Report regualarly…checking your own credit will NOT harm it.

Correcting inaccuracies – Under the Fair Credit Reporting Act, consumers are protected if there is inaccurate information on their credit reports. If you find inaccurate information on your credit reports, you can contact the associated creditor or lender directly. You can also dispute the inaccuracy with the credit reporting companies.

Know the system – Managing your credit and maintaining a good credit history can lead to better rates on major purchases. It’s recommend that you check your credit reports every 6-12 months, or at least 3 months before a major purchase, in order to identify potential inaccuracies and any signs of identity theft.

Routine check-ups, along with paying your bills on time, keeping your credit card balances below 35% of their limits, and correcting any inaccuracies will help ensure your credit reports are viewed in the most favorable light.

Finally, if you believe you’re a victim of fraud, you can activate automatic fraud alerts and the credit bureaus will place an initial alert on your credit report. This alert encourages lenders to take extra steps to verify your identity before extending credit.

References:

  1. https://www.creditonebank.com/articles/10-famous-quotes-about-finances-credit

Benjamin Graham

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Every investment is the present value of all future cash flow.

Benjamin Graham, colleague and mentor to billionaire investor Warren Buffett,  is widely acknowledged as the father of value investing. His timeless book, The Intelligent Investor, is considered the value investor’s bible for both individual investors and Wall Street professionals.

Many of Benjamin Graham’s concepts are deemed fundamental for value investors, and his concepts should be studied and followed for anyone who plans to invest long term in the stock market.

For example, “Margin of Safety” is the famous term coined by Ben Graham. In simple terms, an asset worth $100 and bought at $80 has a better Margin of Safety than the same asset purchased at $95. In other words, “A great company is not a great investment if you pay too much for the stock”,  according to Benjamin Graham.

The 10 Benjamin Graham quotes, all of which are valuable in today’s market, tell us that::

  1. “A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”
  2. “People who invest make money for themselves; people who speculate make money for their brokers.”
  3. “While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street, it almost invariably leads to disaster.”
  4. “Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”
  5. “Obvious prospects for physical growth in a business do not translate into obvious profits for investors.”
  6. “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
  7. “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.”
  8. “The intelligent investor is a realist who sells to optimists and buys from pessimists.”
  9. “The investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.”
  10. “Weighing the evidence objectively, the intelligent investor should conclude that IPO does not stand only for ‘initial public offering.’ More accurately, it is also shorthand for: It’s Probably Overpriced, Imaginary Profits Only, Insiders’ Private Opportunity, or Idiotic, Preposterous, and Outrageous.”

See the source image“I never ask if the market is going to go up or down because I don’t know, and besides, it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is lowest-priced in relation to what I believe it is worth?’ Forty years of experience have taught me you can make money without ever knowing which way the market is going.”—Sir John Templeton

“Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” – Benjamin Graham

“Successful investing is about managing risk, not avoiding it.” – Benjamin Graham

References:

  1. https://cabotwealth.com/daily/value-investing/benjamin-graham-quotes-to-improve-your-investing-results/

Habits and System Building

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“Your system is the collection of daily habits.” James Clear

Behaviors and Beliefs are a two way Street, says James Clear, author of “Atomic Habit”. Effectively, the way you act influences what you believe about yourself; what you believe about yourself influences the actions you take and the manner in which you behave. But, you should let the behavior lead the way, explains Clear.

Every action you take on a daily basis is a vote regarding the person you are currently and want to become in the future. Everyday you’re casting votes to become the person you see yourself. Habits matter because they reenforce the person you want to become.

Build a system.

You want to focus on developing a process / building a system or achieving a goal or outcome. You don’t rise to the level of your goals, you fail to the level of your system. Building the system — the way you prepare — that executes on achieving your goals is what is important. The system is what gets you closer to your destination. Ask yourself what you’re optimizing for?

Your goal is your desired outcome. Your system is the collection of daily habits you follow. Your system is your collection of daily habits you follow. Your current daily habits are perfectly designed to deliver your current results. Over a long period of time, your life bends towards your system, or collection of habits.

The purpose of habits:

Habits are the autopilot mode that your brain goes into when completing repetitive tasks, according to James Clear, author of “Atomic Habits”. For example, driving to work, the first time you do it, it may be confusing and stressful but after a few weeks your mind is just going through the motions, explains Clear.

Not having a grasp on your habits means not having control of your life and outcomes…consider:

  1. No financial habits = living pay check to paycheck.
  2. No healthy food and exercise habits = lacking energy and good health.

Without good habits, you will always be behind the curve. Success in your life and finances depends on the effectiveness of your habits and systems.

  • Your system for reading might be to read at least 1 page before bed every night.
  • Your system for exercising might be to do at least 5 minutes of bodyweight exercise every morning.
  • Your system for healthy eating might be to eat at least 1 apple every day for lunch.
  • Habits are the “compound interest”of self-improvement.

The bigger your systems, the bigger your results. Systems are the vehicles that are going to take you to your goals—your goals are simply the destination. Effectively, you don’t rise to the level of your goals; you fall to the level of your systems.

If you want to change the world and do big things, the actions you’re doing every day, your habits, are what are going to get you there. That’s where the things happens.

“You do not rise to the level of your goals.  You fall to the level of your systems.”James Clear

Showing up each day and making one small choice or trying to do something in a slightly better way, and then watching that compound and multiply over time. In life, changes may seem relatively small and insignificant on a daily basis, but over 10 or 20 or 30 years, small choices and changes can make meaningful difference.

What starts out small and seems relatively insignificant, grows and accumulates into something bigger.

Your mindsets and your systems can set us up for success. It is important to understand the importance of consistency when it comes to forming habits that last.

“Changes that seem small and unimportant at first will compound into remarkable results if you’re willing to stick with them for years”, says Clear. “We all deal with setbacks, but in the long run, the quality of our lives depends on the quality of our habits. With the same habits, you’ll end up with the same results. With better habits, anything is possible.”

Small incremental changes can end in massive results. Small improvements day by day will result in a huge compounding effect, says Clear.

References:

  1. https://movemequotes.com/beyond-the-quote-8/
  2. https://brenebrown.com/podcast/atomic-habits-part-1-of-2/
  3. https://theherstonproject.com/2020/11/atomic-habits-summary/

African Americans are less likely to participate in the stock market | Kiplinger Magazine

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There are many well-known historical racial based disparities in the American financial system that have contributed to the current wealth gap between Black Americans and their White peers.

Wealth (defined as the difference between a household’s assets and debt) provides a critical safety net to households during economic downturns. According to The Brookings Institute, wealth holds several significant advantages over wages as an economic resource: In particular, income from wealth is taxed at much lower rates than income from work, and wealth can serve as a source of savings to absorb temporary setbacks such as a loss of employment income.

The denial of access to wealth-building homeownership and education benefits in the GI Bill, redlining and loan rejections for businesses are several critical components of today’s widely discussed racial wealth gap.

Throw in historically lower wages and education gaps and you find there is a staggering difference in wealth by race. White families have roughly eight times the wealth of Black families, according to The Brookings Institution. In 2019 the median white household held $188,200 in wealth—7.8 times that of the typical Black household wealth of $24,100.

This historical context is critical in understanding that individual achievement must be matched with policies that address the framework that has yielded this result.

While there is much to do to address the broader systemic issues, every day that goes by is an opportunity to shore up individual situations. There are steps to building and creating wealth such as stock ownership.

Stock ownership

While more than half of White Americans own some equities, that number falls to about a third for Black families, according to data from the Federal Reserve.

Investing in stocks is an important means of building wealth over time and generating the returns necessary for retirement.

Take action: For many people, the easiest way to start investing in the stock market is through their workplace retirement plan. If your employer offers a retirement savings plan, make sure you contribute enough to earn any matching contribution your employer offers. Also be sure to evaluate the investment options and get the assistance and information you need from your employer to select an investment approach that is right for you.

If you start with a low percentage contribution, you can typically increase the amount you save over time (some companies even let you do this automatically), with the goal of saving at least 10% to 15% of your income for retirement. The compounding effect of investing money over time can often help you accumulate more than you think.

If you don’t have access to a 401(k), consider contributing to an IRA for retirement savings. You can open an IRA with a brokerage and follow similar principles as you would with a 401(k) account.

Source: https://www.kiplinger.com/personal-finance/604231/the-biggest-financial-barriers-facing-black-americans-and-strategies-to

Getting Started on the Road to Building Wealth

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“The most difficult thing is the decision to act, the rest is merely tenacity.” ~Amelia Earhart~

Amelia Earhart addresses one of the hardest parts about achieving financial freedom and building wealth—just getting started. After getting started, she suggests correctly, it’s merely a matter of sticking with a system and your financial or wealth building plan.

Ms. Earhart’s advice mirrors another adage about the importance of just getting started by China’s Lao Tzu, the father of Taoism: “The journey of a thousand miles begins with a single step.”

Saving money is important, whether you’re creating an emergency fund or working toward a long-term goal like a vacation or retirement. But there is a difference between saving money and building wealth.

If you establish an habit to save 10% to 20% of your income each year, the money will add up over time, and you will end up with savings that you can dip into when you need it. If you invest the money that you save, your money will start working for you and create more money through stock price appreciate, dividends and the power of compounding.

This is when and where you will begin to build substantial wealth.

The purpose of earning (active and passive income) and saving money are to pay for your investments, which will build wealth and pay for your future. Investing involves buying assets, which are things that will likely go up in value. It’s important to “see every dollar as a “seed” that can be planted to earn a hundred more dollars, which can then be replanted to earn a thousand more dollars”, says T Harv Eker, author of The Millionaire Mind.

“Focus on all four of your net worth factors: increasing your income, increasing your savings, increasing your investment returns, and decreasing your cost of living by simplifying your lifestyle.”– T. Harv Eker

Focus on all four net worth factors:

The true measure of wealth is net worth, not working income.The four net worth factors, according to Eker, are:

  1. Income (working income and passive income)
  2. Savings
  3. Investments
  4. Simplification – decreasing your cost of living by simplifying your lifestyle (you consciously create a lifestyle in which you need less cash flow).

By tracking your worth, you are focusing on it, and because what you focus on expands, your net worth will expand. By the way, these laws go for every other part of your life: what you focus on expands and, like, what you measure, you manage.

The goal is to get educated. Learn about the world of investing. Become familiar with a variety of different investment asset classes and financial instruments, such as stocks, bonds, mutual funds, exchange traded funds (ETF), real estate, mortgages, stocks, and currency exchange. Then choose one primary asset class in which to become an expert. Begin investing in that asset and then diversify into other assets later.

It comes down to this: you must work hard, save, and invest your money so you can have options, live the lifestyle of your dreams and achieve financial freedom later in life.

References:

  1. https://www.creditonebank.com/articles/10-famous-quotes-about-finances-credit
  2. https://www.thebalance.com/how-do-i-begin-to-build-wealth-2386145
  3. https://www.edwardjones.com/us-en/market-news-insights/personal-finance/investing-strategies/investing-rules-road
  4. https://www.harveker.com/top-10-tips-for-wealth-success/
  5. https://www.wealthofhappiness.com/secrets-of-the-millionaire-mindset/
  6. https://www.sitrakaratsimba.com/secrets-of-the-millionaire-mind/

Inflation…the Enemy of Savers

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Inflation is the enemy of those who save.

For most of the 21st century, savers and investors have experienced a favorable period of relative low inflation stock market growth. In fact, the average annual inflation rate from 2000 through 2021 was 2.31%. Even with that “low” inflation rate, the proverbial uninvested dollar hidden under one’s mattress in the year 2000 would be worth a mere $0.62 today.

With inflation approaching 7% in late 2021, we’re on the precipice of witnessing the rapid erosion in the value of the dollar which will create substantial risk for ordinary savers and ultra conservative investors. Keeping your money in a savings account, money market or CDs is failing to protect it from inflation.

Instead, the best place to invest is in the economy. While large sums of money are generally required to purchase real estate or a small business, the stock market allows those with limited capital a means to invest regularly in a wide variety of businesses and benefit from the strength of the economy.

The equity markets have a history of robust returns over the long run. Over the last one hundred years, the average annual stock market return is 10%. That means investors who stay invested are nearly doubling their investments every seven years.

Some individuals view the stock market as too risky and they literally view investing in the market as “gambling”. But, when you choose to use less “risky” investments like bonds rather than investing in stocks, the results vary great.

A study by NYU’s Stern School of Business gives insights into historical returns provided by an investment in U.S. Treasury bonds as opposed to corporate bonds and the S&P 500.

Assume an investor received a $300 inheritance on the day he was born. On that date, his parents invested $100 (the inflation-adjusted equivalent of $1,630 today) in several asset classes in 1928.

As of September of 2021, the above investor would have $8,920.90 in U.S. Treasury bonds, $53,736.50 from corporate bonds, and $592,868 in returns from an index fund that tracked the S&P 500.

Obviously, the stock market beats “safe” investments. While bonds might play an important role in a balanced portfolio, a 100% bond portfolio will fail to achieve the investment goals for most.

Investing a little now is better than a lot later

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein

A strong argument can be made that the amount of time one is in the market is of more importance than the sum invested in stocks.

Consistently timing the market is impossible. There literally is no human being who can claim that he or she has been successful at that task with any degree of honesty. However, timing the market is not only unachievable, attempting to time the market can lead to poor investment returns.

Over time, this would result in an ever-falling income stream. You spent your life buying stocks because they are a great source of return, that doesn’t stop just because you retire! The market is still the best source of future returns, you should be continuing to buy more, not sell!

If one largely invests in stocks with yields of 5% or more, you can receive a substantial annual income without cannibalizing your portfolio. Furthermore, if the average annual market return is 10%, a stock that yields in the high single digits does not need to appreciate markedly to provide market-beating returns.

Higher yield stocks outperform more often. They distribute cash on a recurring basis, whether share prices are up or down. Prices are volatile, and at the whims of emotional investors, dividends are the profit generated by the business and distributed to shareholders.

Any investor with an employer with matching contributions should take full advantage of that opportunity. Any investor with an employer with matching contributions should take full advantage of that opportunity.

By investing in dividend-bearing stocks and resisting the temptation to time the markets, you can be well on your way to building wealth and achieving financial freedom.

References:

  1. https://seekingalpha.com/article/4484316-retirement-what-novice-investors-must-know

The Ultimate Buy and Hold Strategy

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The Ultimate Buy and Hold Strategy is an extremely effective way to “beat the market” if you regard the S&P 500 as “the market.” Paul A. Merriman

For more than half a century, investors who held equal parts of the S&P 500 index funds and nine other equity asset classes could more than double their long-term returns — with surprisingly little additional risk, explains Paul A. Merriman, founder of investment-advisory firm Merriman Wealth Management..

Much of the additional investment return comes from adding value, small-cap and international stocks to the S&P 500 index portfolio. By itself, the S&P 500 index is a good investment. Since 1928, the worst 40-year period for the S&P 500 index was a compound annual growth rate of 8.9%; the best was 12.5%.

For the past 52 calendar years, from 1970 through 2021, the S&P 500 index has compounded at 11%. An initial investment of $100,000 in 1970 would have grown to $23.1 million by the end of 2021.

The Ultimate Buy and Hold Strategy is an extremely effective way to “beat the market” if you regard the S&P 500 index as “the market.” Instead of investing all your capital into a S&P 500 index fund, you diversify your money amongst a variety of index funds, as follows:

  • 10% into large-cap S&P 500 index stocks
  • 10% into large-cap value stocks
  • 10% into U.S. small-cap blend stocks
  • 10% into U.S. small-cap value stocks
  • 10% of the portfolio to four more important asset classes:
  • 10% into international large-cap blend stocks
  • 10% into international large-cap value stocks
  • 10% into international small-cap blend stocks
  • 10% international small-cap value stocks
  • 10% in emerging markets stocks

Index funds are exchange-traded fund (ETF) or mutual fund. ETFs and mutual funds that are pooled investments of stocks or bonds. They offer investors a highly diversified opportunity to invest in a specific index, sector, or a wide range of other portfolio compositions.

When it comes to index funds, these funds’ portfolios are constructed specifically to mimic the action seen in the underlying index. Index funds — in particular low-cost index funds — should have a place in just about anyone’s investment portfolio.

Ultimate portfolio requires owning and periodically rebalancing 10 component parts.

The “ultimate” all-equity portfolio automatically takes advantage of stock-market opportunities wherever the opportunities might be.

“A low-cost index fund is the most sensible equity investment for the great majority of investors. By periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals.” Warren Buffett

References:

  1. https://www.marketwatch.com/story/this-investment-strategy-is-an-extremely-effective-way-to-beat-the-s-p-500-11645065209
  2. https://www.moneycrashers.com/warren-buffett-invest-index-funds/

9 Good Financial and Wealth Building Habits

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Developing good financial habits is pivotal to maintaining a healthy financial life. It can be the most important tool you have to reach your goal of eliminating personal debt. Regardless of any bad money habits you’ve had in the past, there’s always time to make changes for the future.

When adjusting your approach, don’t hesitate to learn from others. This could be the difference between success and continuing down the same old path.

Below are nine good financial habits.

1. Create a budget.

The median household income in the United States in 2019 was $68,703. Whether you earn more or less than this, a budget can help keep your finances on track.

When you know how much you earn, it’s much easier to determine how much you can comfortably spend each month.

2. Avoid or consolidate higher-interest credit card and personal debt.

Unexpected expenses can come up and we don’t always have the cash to pay for them. So we might swipe a credit card or take out a loan.

The good news is you may be able to consolidate your higher-interest debt with a fixed rate personal loan, saving time and interest costs.

If you’re paying a high interest rate on debt, and you had the opportunity to pay a lower rate that might lessen your monthly payment, why wouldn’t you?

3. Understand your financial circumstances.

You need to understand every aspect of your financial situation. From how much you earn to how you’re spending your money, every last detail is important.

With an understanding of your finances, you’ll always know what makes the most sense for you and your money.

4. Learn from past mistakes and failures.

Learning from you past mistakes is one of the most critical money habits you can form. Even the most successful people make financial mistakes from time to time. For example, maybe you buried yourself in store card debt. Or maybe you “bit off more than you could chew” with a car loan.

It’s okay to make financial mistakes, as long as you learn from them and use what you learn to manage your debt.

5. Set goals and create a plan .

Have you set both short- and long-term financial goals? Are you tracking your progress, month in and month out?

Taking this one step further, you can do more than think about goals in your head. See where putting your goals to paper takes you. You could get a new sense of clarity and focus with everything written out in front of you.

According to a research study completed by Gail Matthews at Dominican University, people who write down their goals accomplish “significantly more.”

6. Ask questions.

Although you know your financial situation better than anyone else, there are times when it makes sense to ask questions.

For example, a CPA can provide guidance related to your tax situation. With more than 658,000 of these professionals in the United States alone, there are plenty of options for advisement.

7. Save for retirement.

Many Americans carry debt and find it difficult to save money. These challenges can make it hard to pay attention to retirement savings. In fact, a recent Employee Benefit Research Institute survey found a majority of people saying debt may be a hindrance to their retirement plans.

You won’t be alone if you opt against saving for retirement, but if comfortable retirement is one of your goals, look towards the future. Putting a bit of money away for retirement is a good financial habit; consolidating higher-interest debt so that you save money on interest may be one way to find more savings opportunities.

8. Automate your savings.

There are many reasons why people may not save as much money as they should. For example, they may touch every bit of money they earn, meaning it never ends up in the right place.

Protect against this by automating savings. Think about it like this: you can’t spend money that you don’t see or touch.

9. Pay down debt.

Taking on debt can be a successful strategy as long as you’re comfortable with two things:

  • The monthly payment
  • Your ability (and willingness) to pay down the debt.

The longer you let debt linger the more you’ll pay in interest. Furthermore, debt can hold you back from reaching other goals, such as saving for retirement.

If you implement these nine good financial habits, you may end up feeling better about your current situation and what the future will bring.

Creating a wealth plan

A well thought out wealth plan rests on three essential pillars:

  • Save
  • Invest
  • Repeat

These are the core principles of every wealth plan. Disregarding even one will render a wealth plan useless. An important aspect to consider is that a wealth plan should be tailored to each individual’s needs and goals. So pay attention, and make sure that these simple steps are followed in order to create a wealth plan that allows individuals to achieve their dreams of building wealth and financial freedom.

A wealth plan is a resource to help you achieve your financial goals. As it allows you to plan, and use it as a guide throughout your journey. However, having a wealth plan is not a guarantee of anything.

Achieving wealth is like building a house. Thus, having the best architectural design will not ensure that the final product will be outstanding. This is why execution is the differentiating factor in achieving wealth. There are certainly several advantages to having a well-thought-out plan to help you in this process, such as:

  • Clear vision over goals
  • Easily control expenses and estimate savings
  • Automate investments
  • Define a strategy to achieve wealth
  • Adapt your strategy over time

In essence, a wealth plan acts as a roadmap to financial freedom. The main difference is a map usually has a clear path towards a destination. A wealth plan, on the other hand, is filled with unknowns and obstacles that may lay ahead.

In essence, a wealth plan acts as a roadmap to financial freedom.

References:

  1. https://www.discover.com/personal-loans/resources/consolidate-debt/good-financial-habits/
  2. https://goodmenproject.com/featured-content/how-to-create-a-wealth-plan-get-started-now/

Successful Investors are Patient

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“The stock market is a device to transfer money from the impatient to the patient.” — Warren Buffett

Patience is ofter referred to as the most underused investing skill and virute. And, learning patience could help you reach your financial goals of wealth building and finacial freedom.

Be extremely patient when investing in assets and wait until you can buy an investment at an entry price when everybody else hates the investment or are extremely pessimistic about the prospects of the investment.

In other words, wait until you can buy the asset at a extremely discounted price.  Keep in mind that every investment is affected by what you pay for it.  The less you pay, the better your rate of return on that investment.  Never, Never, Never…overpay for an investment.

People feel losses twice as much as they feel gains.

Successful investors develop a number of valuable skills over their lifetimes. And many report that patience is the most important skill to learn and master, but often it goes underused.

We’re not born patient. But, patience can be learned and, if you’re an investor, learning it could help you reach your financial goals.

Patience often involves staying calm in situations where you lack control. Even if we’re patient in some parts of life, we have to practice and adapt to be patient in new situations. Just because you’re a patient person while waiting in line at the DMV doesn’t mean you’re a patient investor.

Alway keep in mind and retain the mantra that…if there is a good opportunity now, a better one will come in the future.

Yet, patience can be difficult for investors to master, why it’s an important investing skill and how to apply patience to investing.

Why Is it so Hard to Be Patient?
Simply put, your brain makes it hard to be patient. Human beings were designed to react to threats, either real or perceived. Stressful situations trigger a physiological response in people. You’ve likely heard this called the “fight-or-flight” response — either attack or run away, whatever helps alleviate the threat.

The problem is, your body doesn’t recognize the difference between true physical danger (during which fighting or fleeing would actually be helpful) and psychological triggers, like scary movies. Being patient is difficult because it means overcoming these natural instincts. Turbulent financial markets can trigger the response too but, unlike scary movies, there can be real-world impacts you’ll need patience to overcome.

When markets are seesawing and you’re overwhelmed with negative financial media, as we experienced this year during the pandemic-driven bear market, your brain perceives a threat to your financial well-being. Even though stock market volatility isn’t a physical threat, the fight-or-flight response kicks in, emotion takes over, and your brain starts telling you to do something. Your investment portfolio is being harmed! Take action! Now! With investing, action too often translates into selling something because selling feels like you’re shielding your portfolio from further harm. But selling at the wrong time — like in the middle of a major downturn — is one of the biggest investment mistakes you can make.

Impatient investors let anxiety and emotion rule their decision-making. Their tendency towards “doing something” can lead to detrimental investing behaviors: checking account balances too often, focusing on short-term volatility, selling or buying at the wrong time or abandoning a long-term strategic investment plan. And those bad behaviors could damage investors’ long-term returns.

Selling out of the market during a correction might feel like you’re taking prudent action. And you may even derive some pleasure in seeing the market continue to fall after you’ve sold your equities. But that pleasure could soon be replaced by regret, because consistently and correctly timing the market by selling and buying back in at the right time requires an incredible amount of luck — and we don’t know any investors who have that much luck.

Investment entry point and investor patience are super-important too.

Benjamin Graham, known as the “father of value investing,” knew the importance of patience in investing. Patience and investing are actually natural partners. Investing is a long-term prospect, the benefits of which typically come after many years. Patience, too, is a behavior where the benefits are mostly long-term. To be patient is to endure some short-term hardship for a future reward.

The importance of being patient when investing can be best summed in this quote by Benjamin Graham…“In the end, how your investments behave is much less important than how you behave.”

“We agree with Warren Buffet’s observation that the stock market is designed to transfer money from the active to the patient. By only swinging at fat pitches and avoiding curveballs thrown far outside the strike zone, we attempt to compound your capital at an above average rate while incurring a below average level risk. In investing, patience often means the accumulation of large cash balances as we wait to purchase ‘compounding machines’ at valuations that provide a margin of safety.” Chuck Akre

Compounding works exponentially for the patient investor. The power of compounding is one of the most important concepts that investors need to learn and embrace. Since, patient and time are better friends to the investor than experience, expertise, and even research.

“A lot of people historically have done fairly well investing in companies they just genuinely like, whether it’s been Starbucks or Nike.” Gary Vaynerchuk, CEO, VAYNERMEDIA

References:

  1. https://www.thestreet.com/thestreet-fisher-investments-investor-opportunity/patience-the-most-underused-investing-skill
  2. https://www.nasdaq.com/articles/why-patience-is-crucial-in-long-term-investing
  3. http://mastersinvest.com/patiencequotes