There is overwhelming and well-publicised evidence that to maximise the chance of achieving your investment goals, you should:
1. Invest a reasonable portion (+-15%) of your income in growth assets;
2. Focus on the long-term; and
3. Avoid the temptation to disinvest when the market experiences one of its inevitable, gut-wrenching declines.
So why do so few follow this rational approach?
The main reason is that it requires delayed gratification … You are required to give up a “definite something” now for the promise of a “potential something” in the distant future. And the world we live in today simply doesn’t subscribe to that thinking.
It is so much more appealing to buy a R35 skinny latte with almond milk each morning or upgrade to the latest and greatest iPhone or plan that overseas ski trip to Kitzbuhel than it is to increase your unit trust debit order or allocation to your retirement fund.
Coffees, phones and holidays are fun, social, exciting, immediate and provide a short-term (Instagrammable) high … in fact, even just thinking about them is fun. In contrast, debit orders and retirement savings seem boring, cold, and rational.
The eaters and the waiters
In 1972 psychologist Walter Mischel, a professor at Stanford University, put a group of 3 to 5-year olds in a room with a delicious looking marshmallow on the table. The researchers left the room for 15 minutes and told the children they had two choices. They could either eat the marshmallow or wait until the researchers returned. If they managed to resist temptation, they would receive a reward of a second marshmallow. The findings were fascinating with some eating the marshmallow immediately while others were able to hold out. The researchers then tracked the two groups, the “eaters” and the “waiters”, and found those who had exhibited delayed gratification enjoyed much greater success in educational attainment, body mass index and other life measures.
But waiting 15 minutes for an extra marshmallow is one thing. Waiting years - and sometimes many years, as in the case of investment goals - can be an entirely different thing. So, assuming you are one of the children who ate the marshmallow or the majority of adults who enjoys your daily coffee routine, what can you do to avoid retiring without enough?
Use the power of habit
One of the solutions is to try to develop healthy habits. Habits are routines regularly repeated that over time tend to occur subconsciously. James Clear in his book Atomic Habits examines the science and practice of creating good habits and avoiding destructive ones.
He highlights four components to successful habit forming whether it be a regular exercise regime, eating healthily or investing consistently.
1. Create a cue that gets your attention. Make it obvious.
2. Make it attractive so that you can visualise what is in it for you.
3. Make it easy by removing friction and starting small.
4. Make it satisfying by rewarding your good behaviour. This will encourage you to do it again when you next see the cue.
The more an act is repeated, the easier it gets until it requires little effort and become almost automatic, sub-conscious habit.
Here are a couple of practical examples that might bring the concept to life in the world of investing. I urge you to try one (or both!) of these for some real financial change in the long-term.
• When you get your next salary (cue), invest a portion for a clear, visual goal (attractive), automatically via a debit order (easy), and reward yourself with a monthly treat (satisfying). Before you know it, you would have started to build your nest-egg and developed a healthy habit.
• Before you go on your summer holiday in December (cue), set up an appointment with your financial advisor to discuss progress towards achieving your goals (attractive), for the New Year (easy as diaries free and in the future) and reward yourself with a relaxing holiday and peace of mind that you have a plan (satisfying).
Saving and investing are not easy because they require us to practice delayed gratification. For most of us this is not easy, but it is achievable if you start small and focus on nurturing good habits. This is without doubt one of the most effective ways to help you achieve your investment goals so that one day – you really can have your marshmallow and eat it!