Saturday, January 08, 2022

Is Delayed Gratification The Most Important Trait You Should Develop?

A topic we cover frequently here is doing things for your future self. We make our future easier for ourselves when we have financial plans in order and are executing them as intended. We make our future easier for ourselves, both physically and financially, when we invest in our health and fitness. We improve our chances to gain the outcomes we want by being willing to "pay our dues" in the short term. We enhance our future optionality, our protection with these behaviors against some unexpected turn in our career versus how we thought our careers might play out. 

The point about career could be about deciding one day you want to do something completely different or having your hand forced through some sort of layoff or forced, early retirement. Other ways to phrase this idea is playing the long game, delayed gratification or as we've started referring to lately; low time preference. 

I've built my life around this concept paying career dues into my mid 30's before building my ideal work situation, having always been cognizant of the need to stay fit and live below our means and in how I've run our fire department, not wanting to make panicked policy and procurement decisions as a couple of my predecessors did. 

There's a funny story to how I think I came to be this way, I only recently connected the dots on this. My grandmother loved to bake and the stuff she made was fantastic. Everyone's favorite was chocolate mint cake with chocolate mint frosting. I've never had cake that was better than this. Better than the cake though was the frosting, chocolate mint frosting. We always saved the best for last, saved the chocolate mint frosting for last because it was the best part. Delayed gratification. 

On Facebook and Twitter I post a lot about diet and exercise (I realize I bring it up here all the time too) and it is a focal point within the fire department. The importance ties in with investing and financial planning. If you're healthy enough to avoid spending a fortune on drugs for chronic maladies you are placing fewer burdens on your portfolio or whatever other sources of income you rely on. 

Your 50's can be a great time of life when you're healthy enough to do what you want and have a little money in the bank to be able to afford what you want to do. I suspect I will say the same thing about my 60's too. Think about it, are there any activities that you did 20 years that still interest you now? In terms of physical stuff, for me that would be hiking and wildland firefighting. 

If there are things from 20 years ago that still interest you, then what are the odds you'll still be interested in them ten years from now or further out? Probably pretty high that you'll want to do these activities, that I will want to hike and fight fires ten years from now. The work you put in back then allows you to keep doing that thing today, whether you thought about it or not, you made an investment in yourself, you did something for the future you, the future is here and you're benefitting from whatever you did 20 years ago. I actually joined the fire department 19 years ago though, not 20.

The future is here now and if you've been living below your means (building up a financial cushion) and are healthy then you are benefitting from delayed gratification, having invested in your future (now present) self and low time preference. The ages we thought of as being old when we were 20 don't have to be old when we get there. 40, 50 and I am guessing 60 can be young with some good decisions and habits. 

If this pertains to you, then you understand the benefit and will probably keep investing in yourself this way. If it doesn't pertain yet, life can be much easier with this approach. 

The mindset captured above promotes long term investment success on multiple fronts. 

Think of all the scary stock market events in your lifetime that have led to crashes, bear markets and other forms of panic. Despite all of them, and I promise you there are more than you can remember, the stock market keeps going higher. There will be other scary market events that will feel different in real time but of course they won't be. Those future scary events will end and then the market will eventually make a new high. 

If you're close to my age, then it is a good bet you will see the S&P 500 hit 20,000, right now it is at 4677. I have no idea how long that will take and the next 20 or 30% could always be down but at some point in your lifetime: 20,000. If you can see that long game and tie it into your investing process then it becomes much easier to avoid panicking. If you're 50 today, you want to retire at 65 and I told you that when you are 65, the S&P 500 will be at 18,000 but sometime between now and your 60th birthday, the S&P 500 will touch 3000, would you worry? Having that foreknowledge, would you panic? Of course not.

Well you kind of already know the above. With a long-ish time horizon you know that stock prices will be much higher even if there will be one or two scary bear market declines in the mean time. You still need a suitable asset allocation and pay heed to sequence of return risk but the above paragraph will happen in some fashion, we know this, we just don't know the timing or the price levels. 

Playing the long game promotes investment success for narrower holdings like individual stocks or sector/industry ETFs. Whatever your top performing holding over the last ten years, it hasn't been your best performer every year. Whatever your best performing holding will be over the next ten years, it won't be your best performer every year. No holding can always be the best. 

I've owned the iShares US Medical Device ETF (IHI) for clients for about ten years. According to Yahoo Finance, for the last ten years it is up 520% versus 262% for the S&P 500. In 2021 in lagged the S&P by more than 10 percentage points. In 2016 it was the same as the S&P but in the last couple of months of that year IHI kind of crashed while the S&P traded sideways. Selling it when it struggled would have been a shortsighted, high time preference trade. If anything, the demand profile for devices is even stronger now than it was 10 years ago and while I know there will be periods where it lags over the next ten years, there's no visibility for now of wanting to sell out the position. 

The last point where low time preference helps with long term investing success is with compounding. At some point in your life you learned about compounding. The best way to let your money compound is to...actually let it compound. When you're young, just keep putting in your 10% or more without paying compulsive attention to it and then all of a sudden, one day you'll look and think to yourself "holy cow, that's a lot of money!" When you keep doing that for decades then you might find yourself at 50 or 55 and then say to yourself "holy cow, I'm at my retirement number already!" 

This is not a nudge to retire early but the empowerment of being 50 and being at or close to your number is incredibly liberating. That combined with being fit and healthy and now you are young and 50, you've won. 

I was not exaggerating about that cake and frosting. 

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