Can we learn financial lessons from 5-year olds?
In 1972 a Stanford psychologist studied self-control in young children. He put a marshmallow in front of each child and told the child that if they could wait 15 minutes, they could have a second one. Of the 600 children in the study, about 200 were able to wait long enough to earn the second marshmallow. In two follow-up studies, the children 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 to lean against the wind and do what your portfolio tells you to do, you’ll end up buying low and selling high. A case in point is what has happened in with investments over the past 15 years: since 1996 the stock market has returned 6.5% per year, as has the bond market. But if you rebalanced out of stocks when they made up too much of your portfolio, and out of bonds when they were overweight, you could have earned almost 7.5%.
Looking at our public policies, it’s clear that our economy needs jobs. 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 Federal dollars. Such “table-setting” efforts work, but they take 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 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
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