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What Marshmallows Can Teach Us About Investing: Planning For The Long Horizon

What Marshmallows Can Teach Us About Investing: Planning for the Long Horizon

Imagine for a minute that you’re a young child again. A grownup leaves you alone in a room with one soft, vanilla-y smelling marshmallow. Your sweet tooth is yelling, “Eat it!”—because you’re a kid, after all.

The grownup asks if you’d like just one marshmallow…or perhaps two. The deal is that if you want just one, you can eat it right away. If you want two, you have to wait while the grownup leaves the room for 15 minutes. You can’t eat that single marshmallow in front of you until she returns. Could you stop yourself from wolfing down that treat and wait patiently for a double reward?

This test was actually given to children during a now-famous Stanford University study in the 1960s and ‘70s known as the “Marshmallow Experiment.” It tested how well kids could delay gratification.

The experimenter, Walter Mischel, Ph.D., followed these kids as they got older. And interestingly, his team found that the kids who were able to wait for the second treat also had higher grades, SAT scores and ratings by teachers and parents of their emotional and intellectual skills. As adults, those same kids were less likely than the single-marshmallow-eaters to use drugs and be overweight. They showed more self-control in all areas of their lives.

Investing and financial planning actually has a lot in common with the Marshmallow Experiment. After all, it requires you to choose: Can I give up some things I’d love to have now (i.e. a bigger house, a more expensive car) for a more financially rewarding future (i.e. a more comfortable retirement, the ability to share wealth with my family)? Even those of us with really good self-control find this tradeoff tough from time to time.

Back to the marshmallow kids: They were left all alone in a conference room, with no encouraging friends or adults to help them resist temptation. If you watch them in videos like this one, you’ll see them closing their eyes, sitting on their hands—anything they can do to avoid eating that marshmallow.

When it comes to your finances, though, you’re lucky in that you don’t have to go it alone. Your Wealth Advisor can help provide reasons why you might want to “wait” and let your money grow. He/she can lay out concrete plans to help you choose what you may want to forgo now, in exchange for financial benefits waiting for you later. When you’re tempted to cash out a position too early, or stop making systematic investments, your advisor can help remind you that your planning and investment options require a consistent approach today, and often have a long horizon. Imagine how much easier it might have been for those marshmallow kids if they’d had some reinforcement to help keep them from eating those marshmallows!

If you don’t like marshmallows, don’t worry. Some of the kids didn’t either—they got to choose other treats. You have a similar option with investing: The “treats” waiting for you after many years of smart money management can be whatever is important to you: Your kids’ college tuition (think Kit Kats), money to travel (3 Musketeers), or wealth to give to charity (100 Grand Bars).

The key is to remember that it’s often worth giving up something now for something much better later. Your advisor can help you keep that thought in mind as you review both your portfolio and your long-term goals.

 

Important Disclosure Information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested.  Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable. Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request. This presentation is not a substitute for personalized advice from RegentAtlantic.  This information is current only as of the date on which it was sent.  The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic.  Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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