What the marshmallow experiment can teach you about investing
Summary: The ability to resist immediate gratification for future rewards is important.
In this test, young children were given one marshmallow by the researcher. They were allowed to eat the marshmallow immediately, or if they could wait and not eat it, they would receive an extra marshmallow when the researcher returned (after about 10 – 20 minutes). In other words, the choice was between one now, or two later. Some did not wait, and immediately ate the first marshmallow, while others waited and thus received an extra marshmallow.
What does this have to do with investing?While the example is interesting, you may be wondering what it has to do with your endeavours in the financial markets. Just like the kids waiting impatiently to get their second marshmallows, sighting a reward in the distance, most people who invest do so with an expectation to get rewarded by higher returns over time.
But what kind of return can you expect with investing? Historically a well-diversified, long term equity portfolio yields around 7% - 8% if the dividends are re-invested.
How do you grow your wealth?According to Einstein, compound interest was the 8th wonder of the world that proves its strength, especially in the long run, which is evident from this example.
|Monthly deposit||Number of years||Expected return||Deposit||Result|
And yes, later on, enjoy that extra marshmallow.
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