What the marshmallow test means for patient investors

You have probably heard of the classic marshmallow test conducted more than 40 years ago by US psychologist Walter Mischel.

Professor Mischel, then at Stanford University, led this unique research into delayed gratification – that is, the ability to wait for something that is really wanted.

Hundreds of children aged four to six were taken into a room, one at a time, and given a single marshmallow. They were offered a choice: eat the marshmallow immediately or wait 15 minutes and receive a second one as a reward for waiting.

Only a minority of the children ate their marshmallow immediately after the researchers left the room. A third managed to resist the temptation for a few minutes while the final third earned a second marshmallow.

Follow-up studies of these children 20 years later and again 40 years showed that those who managed to delay their gratification with marshmallows tended to be higher achievers – emotionally, academically and vocationally – as their lives progressed.

Delayed gratification, patience and successfully investing for retirement are indelibly linked. Our superannuation system, for instance, is based on spending less today so we can spend more in retirement. It’s as straightforward as that.

Indeed, delayed gratification has been described as the essence of investing. It is a matter of waiting for a potentially greater reward.

It could be said that investors who attempt to time the market – that is, trying to pick the best times to buy or sell – are seeking instant gratification rather than focusing on their long-term goals.

In a recent discussion paper – Long-Term Investing: The Destination Is Better than the Journey – Peter Gee, research products manager for investment researcher Morningstar, discusses the rewards from taking a long-term perspective to investing. In other, words, he is writing about delayed gratification.

Gee writes that the adage “it’s time in the market, not market-timing” that really matters for investment success is often quoted for good reason – it often holds true.

“One of the key elements to successful investing is patience,” Gee adds. “It is important to remember that a long-term mindset is required to achieve investment goals. Returns in the short-term can be volatile and unpredictable…”

Gee points to Morningstar research showing the short and long-term returns from super funds with balanced portfolios. Their after-fees, after-tax returns to August 2015 were examined over three time periods: rolling one-month, rolling one-year and rolling 10 years.

Even with these broadly-diversified portfolios, the 10-year returns were significantly smoother and much-less volatile than over the short-term.

One of the great benefits from delaying gratification with a carefully constructed and diversified long-term portfolio is the compounding of returns, as income is earned on income as well as an investor’s initial capital.

Investors can certainly learn much from that classic marshmallow test.

Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.

Reproduced with permission of Vanguard Investments Australia Ltd

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