What Is Perseverance?
In finance, perseverance refers to an investor's unwavering commitment to a predetermined investment plan and long-term strategy, especially when faced with adverse market conditions or unexpected setbacks. It is a key concept within behavioral finance, which explores the psychological influences on investor decision-making. Perseverance helps investors avoid impulsive reactions to market volatility, such as panic selling during downturns or chasing speculative trends during bull markets. Instead, it emphasizes sticking to a disciplined approach that aligns with one's financial goals and risk tolerance, allowing long-term strategies to materialize.
History and Origin
While the concept of perseverance itself is ancient, its application and study within the realm of finance gained prominence with the rise of behavioral economics and finance in the latter half of the 20th century. Traditional economic theories often assumed rational actors, but observations of real-world investor behavior, particularly during periods of significant market stress, revealed the profound impact of human psychology. Pioneers in behavioral finance began to formalize how psychological factors, like cognitive biases and emotions, could lead to deviations from rational decision-making.
One of the core tenets promoted by influential figures like John Bogle, founder of Vanguard, was the idea of "staying the course" in investing. This principle, which is synonymous with financial perseverance, advocates for adhering to a diversified, low-cost investment strategy rather than reacting to short-term market noise. The Bogleheads community, inspired by his philosophy, champions this approach, emphasizing that success often comes from steadfastness rather than constant market timing8. Academic research has also contributed to understanding how investor experiences can lead to persistent heterogeneity in beliefs and portfolio choices, underscoring the challenge of maintaining a long-term view through varied market cycles7.
Key Takeaways
- Perseverance in investing is the commitment to a long-term strategy despite market fluctuations.
- It is a critical component of successful long-term investing within behavioral finance.
- Perseverance helps mitigate the negative impacts of emotional investing.
- Historical market data consistently shows that markets tend to recover from downturns, rewarding those who maintain their positions6.
- It involves resisting the urge to deviate from an asset allocation plan during periods of fear or euphoria.
Interpreting Perseverance
Perseverance in finance is not a numerical value but rather a qualitative assessment of an investor's resolve. It is interpreted through an investor's actions and adherence to their pre-established financial strategy. A high degree of perseverance means that an investor will not liquidate holdings prematurely during a bear market or chase "hot" stocks during a bull market that fall outside their initial investment parameters.
It implies a deep understanding and acceptance that investment returns are rarely linear and that periods of drawdown are a normal part of the investment cycle. For instance, maintaining a consistent dollar-cost averaging strategy, even when asset prices are falling, demonstrates perseverance. Conversely, frequent portfolio changes based on headlines or short-term performance would indicate a lack of perseverance.
Hypothetical Example
Consider an investor, Sarah, who established an investment plan aiming for retirement in 30 years. Her plan includes a diversified portfolio of stocks and bonds, with regular contributions and annual rebalancing. Five years into her plan, the market experiences a significant downturn, with her portfolio value dropping by 25%.
Many of Sarah's friends panic, selling their holdings to "stop the bleeding." However, Sarah demonstrates perseverance. She reviews her initial investment thesis, which was based on long-term growth and the historical resilience of the market. Instead of selling, she continues her regular contributions, even buying more shares at lower prices through dollar-cost averaging. She resists the emotional urge to abandon her strategy. Over the next few years, the market recovers, and her portfolio not only regains its losses but begins to grow significantly due to the power of compounding returns on her increased number of shares bought during the downturn. Her perseverance allowed her to capture the subsequent market rebound, aligning with her long-term financial goals.
Practical Applications
Perseverance is fundamental to successful investing and finds practical applications across various facets of financial planning:
- Long-Term Wealth Accumulation: For achieving significant capital preservation and growth, particularly for goals like retirement or college savings, a persistent approach allows the benefits of compounding to accumulate over decades, uninterrupted by short-term market noise.
- Navigating Market Cycles: Every investor will encounter multiple bear market and bull market cycles. Perseverance is crucial for resisting panic selling during downturns and avoiding overly aggressive, speculative investments during booms. Data from over 150 years of stock market crashes indicates that markets have consistently recovered and reached new highs, rewarding those who do not panic and sell5.
- Adherence to Financial Planning: It underpins the ability to stick to a carefully constructed asset allocation and diversification strategy. Regulatory bodies like the U.S. Securities and Exchange Commission (SEC) provide investor education resources that indirectly advocate for disciplined, long-term approaches to mitigate risks associated with impulsive decisions4.
- Overcoming Behavioral Biases: Many behavioral biases, such as loss aversion or herd mentality, can lead investors astray. Perseverance acts as a counterweight, helping investors maintain a rational perspective when confronted with fear or greed. Research highlights how investor experiences can lead to varied beliefs and portfolio choices, making perseverance a key individual trait for consistent investing3.
Limitations and Criticisms
While highly beneficial, an uncritical application of perseverance can have limitations. Blindly adhering to an initial plan without any flexibility, particularly when underlying circumstances change significantly, could be detrimental. For instance, if an investor's risk tolerance genuinely shifts due to major life events (e.g., nearing retirement, significant health changes), adjusting the investment plan is a rational decision, not a lack of perseverance.
The concept does not advocate for ignoring fundamental changes in an investment's thesis or the overall economic landscape. An external link from Kiplinger discusses how the Bogleheads philosophy encourages staying the course but also implies that adjustments like rebalancing are part of a disciplined approach, rather than rigid inaction2. True perseverance involves a committed but adaptive strategy, rather than an unthinking refusal to acknowledge new information or correct genuine errors in the original thesis. Over-reliance on "staying the course" without periodic, objective review could lead to prolonged exposure to a declining asset or an outdated allocation.
Perseverance vs. Patience
While often used interchangeably in an investment context, perseverance and patience have distinct nuances. Perseverance is the active commitment to continue pursuing an investment strategy despite difficulties, setbacks, or discouraging outcomes. It implies an enduring effort to uphold the chosen path through challenges, actively resisting the urge to deviate. For example, an investor who continues to fund their long-term investment accounts during a protracted bear market demonstrates perseverance.
Patience, by contrast, is the capacity to wait calmly without annoyance or anxiety for a desired outcome. In investing, it refers to the ability to allow one's investments to mature over time, understanding that short-term returns are unpredictable and that long-term growth requires a sufficient time horizon. An investor who sets up a diversified portfolio and then refrains from checking it daily, trusting in the process of compounding returns, is demonstrating patience.
Both qualities are crucial for successful investing and are deeply intertwined, especially in long-term investing. Perseverance provides the strength to keep acting according to the plan, while patience provides the calm mindset to let the plan unfold over the necessary duration. An investor truly committed to their financial goals needs both: perseverance to maintain their course of action, and patience to await the results.
FAQs
Why is perseverance important in investing?
Perseverance is crucial because financial markets are inherently unpredictable in the short term, experiencing periods of growth and decline. Maintaining commitment to a well-considered investment plan during these volatile times helps investors avoid costly mistakes like panic selling or chasing fads, ultimately leading to better long-term outcomes.
How does perseverance relate to market downturns?
During market downturns, perseverance means resisting the emotional urge to sell investments at a loss. Instead, it involves sticking to your predetermined asset allocation and potentially even continuing to invest, as history shows that markets tend to recover over time1.
Is perseverance the same as being stubborn with investments?
No, perseverance is not the same as stubbornness. Perseverance implies a disciplined adherence to a sound long-term investing strategy, even when faced with discomfort. Stubbornness, however, would be a refusal to reassess or adjust an investment plan even when fundamental circumstances or assumptions have genuinely changed, which could be detrimental.
Can perseverance be learned or developed?
Yes, perseverance in investing can be developed through education, experience, and building a strong understanding of market history and behavioral biases. Establishing clear financial goals and a realistic investment plan upfront can also significantly aid in fostering this quality.