Of Marshmallows and Investing Success
The Famous Marshmallow Experiment
40 years ago, Walter Mischel of Stanford University conducted a study on the behavior of young children. The children were put in a room with a treat -- and told they could eat it, or if they waited for 15 minutes they would be rewarded with another treat. Some children could wait, but others could not.
Which One Are You?
To succeed at building or preserving wealth over the long term, you have to first defer gratification in the short term. Knowing if you are the type to eat the marshmallow right away, or have the discipline to wait is an important first step.
Simple Strategies To Improve Self-Control
Once you know more about how you might behave, some measures can be put in place to resist temptations that could harm your net worth - such as selling low and buying high, or overspending.
Here are a few ways you can set yourself up to resist such temptations:
- Establish routines: Fretting over your account balances day by day is like grocery shopping on an empty stomach - generally not a good idea. Try extending this to a month, quarter, or longer. Having a set routine will help you ignore the day to day noise of the markets.
- Impose limits: If you are living off your investments and prone to spending it down too quickly, try only allowing yourself to spend income from dividends and interest. Alternatively, consider only spending a set percentage of your portfolio.
- Use other people: Working with your family finances and investments is not easy; some of us routinely put off decisions, while others might be prone to snap decisions with their investments. Working with a trusted financial advisor forces you to think about your future and also acts as a sounding board before you make that big financial decision.