If you put a bag of candy in front of a kid and tell them not to eat any before dinner, and then you leave, what do you think's going to happen? More often than not, the second you leave that candy is gonna get eaten.
I'm actually the same way with certain foods — I can't sit down in front of a bag of chips and not eat them. Even if I'm not hungry, I'll still take a nibble here and there. The only way to make me stop is to get up, put the bag away, and then go sit back down.
Even though I have this lack of control when it comes to food, I'm the complete opposite when it comes to investing. I see the markets go up and down and it rarely provokes me to act. Unfortunately I can't pinpoint what made me this way but I know that I have self control when it comes to timing the markets. I just don't care what the markets are doing on a day-to-day basis since I know I can't touch that money until I retire.
An Experiment in Self-Control
My dilemma with self control reminded me of an experiment I read about called the Stanford marshmallow experiment. In the experiment, children were offered a choice between one small reward (a marshmallow, cookie, or pretzel) provided immediately or two small rewards if the child waited until the experimenter returned (15 minutes later).
As you might imagine, the results showed that most kids couldn't resist the sweet treat and they devoured it before the experimenter returned. What really shocked me about this study though, was the fact that years later when they did a follow-up, the kids who were able to wait longer tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index, and other life measures.
The results make a lot of sense though when you think about it and compare it to investing. What type of investors tend to have the best results? It's been shown over and over that the people who impatiently try to time the market have not had nearly as much success as the long-term, buy-and-hold type of investors. The ones who are willing to wait it out at all costs and stick to their initial investing plan are the ones who end up on top.
Ignore the Noise
There's a certain bit of uncertainty in the marshmallow experiment: will the experimenter really return with two treats or won't he? Similarly to investing, will the markets continue to go up and up forever just because that's what they've done in the past? Or might they drop and never recover? I think the best way to allay your investing fears is to just ignore what's going on in the markets.
I recently heard a rash of news stories about six months ago about the Dow returning to its pre-market meltdown highs and couldn't help but wonder. We've heard tons of firsthand stories of people losing half their retirement accounts, having to postpone their retirement, and staving off stocks altogether because of what happened to their portfolio in the mid 2000s.
This is a big “what if,” but what if they would have ignored everything that happened and left their portfolio untouched? They probably would have come out way ahead of where they are now. And those that had the patience to wait it out and even rebalance by buying more stocks as stocks were falling came out even further ahead.
How Do You Ignore the Markets?
For me, ignoring the markets is easier than you might think. I'm young, so a lot of my friends don't even contribute a significant amount to a 401(k) yet and therefore, most of our conversations tend not to broach the subject of the Dow Jones or the S&P 500. I also try to stay away from the major news sources like CNN and Fox News; it's their job to over-blow what's going on in the market and get you worried. No one would watch the news if everything that happened was good.
Checking the markets used to be a part of my daily routine, I had a widget on my phone that would tell me how all the major indices were doing and that was that. One day though, I decided to delete that widget off my phone and I haven't looked back since. I have no idea what level the Dow is at right now and I think that actually makes me a better investor. Self-control is tough, but when you know that ignoring the markets will reward you in the end there's no reason not to be patient.
Readers, do you find yourself constantly checking how the market is doing? If so, why? Most people only need to rebalance one or two times per year if ever.