Five-Year Old Finance
Can we learn about finance from toddlers?
In 1972 a Stanford psychologist studied self-control in youngsters. He put a marshmallow in front of a child and told the kids that if they could wait 15 minutes, they could have two. Of the 600 children in the study, about a third were able to earn the second marshmallow. In two follow-up studies, those who waited had significantly better results in school and higher test scores, even decades later.
Self-control matters in life. It matters with investments, and it matters with public policy. If you can get past the latest headline screaming sell or buy and lean against the wind to rebalance, you’ll end up buying low and selling high. A case in point is what has happened in with investments over the past 20 years: since 1996 the stock market has returned 8.2% per year—with some pretty significant downturns–while bonds have returned about 5.4%. But if we rebalanced out of stocks when they made up too much of our portfolios, and out of bonds when they were overweight, we would have had a lot fewer headaches along the way.
Looking at our economy, it’s clear that we needs job. But 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 which gave universities legal title to their own research, even if it was funded with government money. Such “table-setting” efforts create sustainable businesses, but they take a lot more time than fixing bridges or laying cable.
If we can show the self-control of a 5-year old, we can strengthen our economy and build portfolios that will enrich us over the long term. But if we go for the short term fix, all we’re left with will be a sugar rush and the certain knowledge that we could have done better.
Douglas R. Tengdin, CFA
Chief Investment Officer