Can 5-year-olds teach us about finance?
Photo: Efes Kitap. Source: Pixabay
In 1972 a Stanford psychologist studied self-control in children. He put a marshmallow in front of each and said that if they could wait 15 minutes before eating it, they could have another. Of the 600 children in the study, about a third were able to wait long enough to earn the second marshmallow—sometimes by covering their eyes. In two follow-up studies, he found that the children who waited had significantly better test scores and overall outcomes later in life. Self-control matters.
It matters in investing. If you bought into the stock market at the height of the internet boom, you would have earned an annualized return of about 4.25% through last month—a little worse than government bonds, but not bad. You had to stick with your holdings, though, and not panic during the dot-com bust and the financial crisis. And if you bought stocks at monthly intervals over the past 15 years—say, in a 401(k)—your annualized return would have been 9.5%. This is way above average, despite the fact that you would have started out when the market was significantly overpriced.
Self-control matters in public policy, too. It’s clear that the economy needs jobs. One of the best ways for the government to help create jobs is by establishing the legal and intellectual infrastructure for productive, sustainable employment—like the Bayh-Dole Act of 1980. This gave universities legal title to their own research, even if it was funded with Federal money. Now companies built around ideas developed in research universities are central pillars of our economy, employing tens of millions. But this takes time.
If we can show the self-control of a 5-year old, we can strengthen our economy and build portfolios that will enrich us in the long run. But if we go for a short term fix, all we’ll get will be a sugar rush and the assurance that we could have done better.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!