In the financial industry, the focus is frequently directed towards technical information – tax rates, stock valuations, price to earnings ratios, alpha, beta, etc. Obviously, these metrics are an integral part of building a well-rounded investment portfolio and financial plan. However, what isn’t discussed as often in the media or in general, is the behavioral side of finance – how do investors feel?
To be honest, the emotional element of investing is what drew me towards becoming a Financial Advisor. I am most passionate about helping people navigate around heuristic techniques or biases that can hinder their long-term success. My goal over the next year is to write about the many behavioral issues and biases that I see investors face on a regular basis.
The introduction to this series is the concept of delayed gratification. Said another way – “If I delay my immediate desire for enjoyment of a particular purchase, I will have a more gratifying experience in the future because I will be able to afford even more.”
The idea of ‘saving for later’ is more important for those of you still in your working years and less important for those of you in retirement. However, withdrawal frequency, legacy planning and future health care concerns are still driving ‘save for later’ factors in retirement. Regardless of circumstance, the question remains – why is it so hard to wait for later?
Many of you are likely familiar with the famous “Stanford Marshmallow Experiment.” In the 1970’s, a psychologist presented children a simple choice: a marshmallow was left in front of the child with the explanation that they could either consume the treat now, or if they waited for a brief period until the examiner returned, they would receive an additional treat to enjoy. Many of the children ate the one marshmallow immediately, but a smaller percentage of children were able to delay their urge to eat it until the examiner returned.
The psychologist’s study discovered that kids who were able to delay their instant gratification had long-term benefits. Those children were tracked for years and performed better academically, statistically displayed fewer behavioral problems, and had significantly higher SAT scores.
With that said, there were some serious flaws to that study in my opinion. For example, in the real-world, the guarantee of receiving a second “treat” is unrealistic. Let’s say someone is trying to lose weight and they give up eating desserts for a month. Unfortunately, delaying the immediate gratification of enjoying a cookie or piece of cake doesn’t guarantee they will lose weight.
If someone sacrifices going to a party with friends to study for an exam, that doesn’t guarantee they will pass the exam. The struggle with delayed gratification is the uncertainty of a better outcome by delaying what’s in front of you immediately. In finance, for many, that is why it is easier to spend excess income instead of saving and growing the money for later.
The median retirement account balance for a 65-year-old in 2021 was just under $70,000. Everyone’s circumstances are going to be different, but these statistics prove that the uncertainty of tomorrow influences spending habits and decisions that can have an adverse effect on long-term financial security.
There is an old saying that we reference in our most recent book, “Ten Keys to Retirement Ease,” that reads: portfolio growth is about time in the market, not timing the market.
Although there is no absolute guarantee that your retirement savings will grow on a day-to-day or month-to-month basis, consistently putting money away over a period of years is what dramatically increases the likelihood of future gratification increasing. Trusting the process of investing repeatedly into fluctuating markets, trusting that your investment risk tolerance fits your comfort level and taking advantage of tax savings opportunities are all factors that will prove to benefit the value of saving for future.
Once investors overcome the hurdle of saving versus spending, there are numerous biases that can factor into why someone will or will not make certain investment decisions. I look forward to diving into those on my upcoming articles.