We tend to take a very long term approach when contemplating many important life decisions such as choosing a spouse, starting a family, education, choosing a career and so on. However, when it comes to money and investing, many people tend to think too short term. One of my favourite quotes is from Howard Schultz (the guy who built Starbucks); “short term profit does not create long term value for anyone”. When managing your money, your sights should be firmly set on creating long term value.
Master delayed gratification
The Stanford marshmallow experiment (a child was offered a choice between one small reward provided immediately or two small rewards if they waited for approximately 15 minutes) concluded that humans that showed a willingness to invest in delayed gratification are likely to have better life outcomes, as measured by school grades, educational attainment, body mass index and other life measures.
Warren Buffett says that “the stock market has a very efficient way of transferring wealth from the impatient to the patient”. Building wealth requires you to prioritise long term returns over shorter term profits, have the patience to wait for those returns and not get distracted by “shiny objects” along the way.
If you are not consciously “doing without”, then the chances are you haven’t recognised the immense long-term value of delayed gratification and consequently your wealth accumulation prospects are being adversely impacted. I define “doing without” as choosing to not spend money on something, even though you can afford to do so (in the short-term), that will give you a lot of instant gratification because it will impair your ability to achieve your long-term goals. Most people must do this at some level.
Instant gratification is like a drug, addictive. That is, the more you have it, the more you want it. And the more you need next time to have the same impact. However, the reverse is true too. The trick is finding a balance.
Short term thinking creates more anxiety
The problem with short term thinking is that it creates anxiety about what the “market” might do in the short term. Will the stock market rise or fall, will interest rates go up or down, will the government change the laws and so on. These are important considerations if you are only focused on potential outcomes in 2 years.
Conversely, long term thinking allows you to ignore all this short-term noise and focus on the fundamentals of investing – as fundamentals always beat short-term narratives in the long-run. For example, it’s a lot easier to approach property investing with a goal of buying a property that will be 3 to 4 times more valuable in 20 years than it is to identify a property that will be worth more in just a few years’ time. In the short-term, the market will be impacted by noise, hysteria and various narratives – so no one really knows what the market will do in the short-term. However, all these short-term things will, in time, dissipate and all you’ll be left with are the asset’s fundamentals (or lack thereof).
The best question you can ask yourself over the Christmas & New Year break is…
What can I do with my money in 2017 so that I’m financially stronger in the long-run (i.e. in 10, 20 and 30 years)? The answer to this question will be significantly different to; what can spend my money on to make me happier in 2017. Good quality and successful financial decisions almost always tend to be based solely or predominantly on long term outcomes. A new car in 2017 won’t make you happier or more comfortable in 20 years but an investment-grade property or a diversified portfolio of low-cost index funds will.
If you would like to educate yourself further over the Christmas break, you can subscribe (at no cost) to my financial planning video series here. It includes 5 short videos on strategy, cash flow, importance of repaying your home loan, super and investing in property. Or, if you would like to discuss this question with me confidentially, please don’t hesitate to make contact with me. We wish you the best success in 2017 and beyond!