The key to long-term investing

Not only are marshmallows delicious to eat around a campfire, they can also teach us a thing or two about our financial future.

The Stanford Marshmallow experiment is a well-known study in the world of psychology. It was carried out in the early 1970s by a professor called Walter Mischel.

The study involved placing children aged 3-5 alone in a room and giving them two options:

1. Eat the marshmallow that’s in front of them right away
2. Wait 15 minutes and receive two marshmallows as a reward.

As you’d expect, some of the children ate the marshmallow in front of them there and then. But there were some who waited the 15 minutes to receive the extra treat.

Fast forward many years later. Perhaps the most interesting thing to come out of the study is most of the children who waited the 15 minutes went on to lead successful lives.

An important lesson for investors

Now, we’re in no way claiming that if you invest your money and wait 15 minutes it will double in value. And the past performance of stock markets is in no way a guide to what may happen in the future. But the longer you’re invested for, the more chance you have of achieving a higher return over time.

With this in mind, we caught up with Kieran Ellis, a Technical Research Specialist here at Skipton. Kieran fills us in on his top three tips for keeping focused on your long-term goals when it comes to your investments.

1. Accept there will be times when markets fall

Market falls are a part of investing. It’s a fact.
But avoiding knee-jerk reactions to short-term falls is key to long-term investment success. However, it requires discipline.

There’s no doubt that money is an emotional subject.

• Over 73% of wealth managers believe emotional decision-making costs investors returns. (According to research from Oxford Risk.)
• Research shows that we tend to feel the pain of a loss twice as much as the joy of an equivalent gain. (According to the Decision Lab.)

Kieran continues, “No matter how rational we think we are, we can all be prone to letting our emotions guide the decisions we make.

“In fact, your mood can dramatically influence the way you see the world. This means people often become more optimistic and self-confident when markets rise, only to panic when they fall.

“By acknowledging your emotions around money, this could help you to make better financial decisions for your future goals.

“The best investors tend not to react to short-term events. Rather they accept that uncertainty is a part of investing and they adapt their investment plans to suit for the long-term.”

Which brings us nicely to Kieran’s second tip.

2. Take a diversified approach

Luckily for you, we’ve got you covered on this one.

Kieran explains, “You’ve probably heard this referred to as not putting all your eggs in one basket. For example, not investing all of your money just into shares or into only one country.

“When you first came to Skipton, your financial adviser helped you to invest in a way that’s right for you. This involved providing you with a balanced exposure to a range of different asset classes (like shares, fixed income and property), locations all over the world, and investment styles, so you’re not overly exposed to one type of area.

“Investing can be unpredictable, but by spreading your money and remaining committed to your long-term goals, you’re more prepared for market ups and downs.”

3. Think about the bigger picture

Kieran tells us, “When it feels like the going is getting tough, you should question whether a short-term blip in markets now will fully derail your chances of reaching your long-term goals later.

“Remember, that’s the reason why you invested in the first place – to reach future goals. So it’s really important to keep this in mind.

“Whether it’s supporting the kids through university, enjoying a comfortable retirement, or trying to get more from your savings. You invest your money as a way of helping you to achieve these all-important goals.

“At times, investing can seem like a challenging feat. But that should only be a short-term feeling and won’t last forever. By staying calm, invested and focused on your long-term goals, you could benefit when markets rise."