The Stanford Marshmallow Experiment is one of the more famous studies in the field of psychology.
It was conducted in the early 1970s by Walter Mischel, a professor at Stanford University, and involved placing subjects – children aged 3-5 – alone in a room and presenting them with a simple choice: to eat the marshmallow in front of them right away or hold out for 15 minutes and receive two as a reward.
Unsurprisingly, some children quickly wolfed down the treat. But others were more inclined to wait. Follow-up studies many years later appeared to throw up an interesting insight: that the children who were able to delay gratification also enjoyed better life outcomes.
Today, Mischel’s research stands as a cautionary tale about the dangers of prioritising short- over long-term thinking – and the value of keeping an eye locked firmly on the future.
The short-comings of short-termism
Short-termism is something that’s hard-wired into our DNA, and we can be guilty of it all the time, in all areas of our lives. That’s arguably truer of the present than at any other time in recent memory, as we refocus on our financial wellbeing – and it’s entirely understandable.
During a period of great fragility, marked by high inflation and market volatility, it’s hard not to fixate on immediate needs, at the expense of working towards long-term goals.
And yet we need to find a way to work past our fears and overcome our biases to avoid the temptations of short-term gains, certainly in the context of our investment strategies. A short-sighted approach to wealth creation will seldom yield the best results.
Why it’s important to take a step back
“The last thing you want to do is cash in your investments when prices have fallen, and then try to buy back in after they’ve bounced back up,” agrees Andrew Shaw, our Strategy & Communication Director. “When we suffer these market shocks, we first need to take a step back and consider whether we’re speculators or investors.”
History shows us that market falls are a feature of investing, and that volatility should be expected from time to time. However, while these short falls can happen relatively frequently, looking over the long-term, markets tend to rise.
Past performance is not indicative of future performance.
We are currently in one of these falls, however you don’t have to look too far back to see another dramatic example of how these situations can quickly reverse. In March 2020, markets plummeted as the true nature of the COVID-19 pandemic became clearer and countries began imposing lock-downs. However, in April – the very next month – markets bounced back strongly, and investors experienced one of the best months for returns of the past 30 years.
Past performance is not indicative of future performance.
Timing the market with any form of consistency is almost impossible and missing out on months where the market performed well will have negative long-term consequences for returns. Even missing out on a few days could have a dramatic long-term impact.
So, rather than focusing on short-term fluctuations it’s more important to compare returns alongside a reformulated set of objectives.
“You need to keep in mind what it is you’re trying to achieve – supporting your kids through university, or enjoying a comfortable retirement,” says Shaw. “Then think about how your investments are going to help you get there.”
Stock market crashes are often emotionally charged. When they do inevitably occur, people can feel compelled to react; to do something to protect themselves. We see it time and again. It’s really important to maintain distance, and ask ourselves: what is it we want our money to do – and by when?
The golden rules of investing
To stay on track, Shaw reckons we should return to the timeless, golden rules of investing.
This means thinking in decades not days, with a goal or plan to guide us – and acknowledging that there will always be times when markets are more volatile. It also means avoiding changing a long term strategy because of a short-term correction. “It’s time in the market, not timing the market that’s key,” he points out.
By adopting this approach and sticking with it, patient investors – who invest regularly – will be able to benefit from so-called ‘pound cost averaging’. This simply involves investing at regular intervals, resulting in more shares being purchased when prices are low, and fewer shares purchased when prices are high.
“Buying more units when markets are down can lead to better returns when the outlook is more bullish,” says Shaw.
Diversification is essential too, he adds, emphasising that by spreading your money across multiple types of investments and geographic areas, we can potentially mitigate our exposure to risk.
Avoiding knee-jerk reactions to short-term volatility and keeping your goals in mind requires discipline, and this is where regular financial reviews can come into their own.
“Using an adviser as a sounding board can help us renew our financial choices – and prevent us from making poor ones – by bringing us back to our core priorities,” says Shaw. “They’ll remind us of the most crucial questions: what do we want to do with our money; and have our objectives or timescales for achieving those goals changed?”
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.