A Watched Pot Never Boils

April 24th, 2008 at 04:03pm Tom Muldowney

  Thomas A. Muldowney, MSFS, ChFC, CLU, CFP®, CRC, CMP®, AIF® 

You probably heard this old adage from your mom.  I think that the best financial advice comes from mom and has done so through out the ages.  “Don’t put all your eggs in one basket” (diversify), and “buy things when they are on sale” (buy low/sell high) come directly to mind. 

Well my mom admonished my frequent impatience…she said, “a watched pot never boils.”  She was right.  If you put water on the stove, and you stand there waiting for it to boil so you can make your tea, it seems to take forever.  So to make it feel like we’ve speeded up the process, you may consider putting the pot of water on the stove, then doing a short task, like throwing in a load of laundry, after you have put in the laundry, the water is ready for the tea.  This doesn’t make the water boil any faster, it just seems like it does.  (And now you know who does the laundry at my house.) 

Whenever and whatever we watch, if we watch with impatience, it never seems to happen.   Consider trying to lose weight…If you step on the scale every few hours, you’ll probably be frustrated.   If you place a hot fudge sundae in front of you after dinner, you’ll easily rationalize away the 600 calories.  You’ll say to yourself “I’ll work it off later on!” You will actually get a moment of joy, but you probably won’t lose any weight either.  In combination, watching the scale and eating the hot fudge sundae are hurtful.  You’ll already feel bad AND you’ll do the exact opposite of what you are supposed to do…(push that sundae away!).  Don’t do the things that make your weight loss seem longer, and by golly, don’t do things that are going to frustrate your long term plans to lose weight. 

You have heard the old aphorism that ‘something’ is ‘so boring, it’s like watching paint dry.’ Building a successful portfolio of retirement assets is even more boring, it’s like watching paint fade. 

Over the past 82 years the broad market (largest 500 stocks) has grown by 10.4%.  You have also probably heard that if, over the past 82 years, you had missed the top ten days OR the top ten months, that you would have significantly under-performed the market by as much as half.  What is often not discussed in those ‘big gainer months’ is that the top ten days are usually preceded by the ten worst days (or months).   This “worst” followed by the “best” pattern of days is why the market is referred to as volatile.  It is also, why you shouldn’t watch! 

Recent psychology studies, in behavioral finance, have also shown us that losses feel twice as bad as gains feel good.  That means that even though the worst days are followed by better days, we still feel worse for the wear even after we have made up for the losses that we endured. 

So, what can we learn from this?  If we look at it over the long run, we can have confidence that the market produces returns that are positive and in the range of 10% but only if we have the patience to tolerate the worst days mixed with the best days.Your action steps are contained herein: First, just like losing weight, don’t look every moment of every day…it won’t speed up the returns at all.  But it will seem to make the volatility a bit easier to tolerate   Secondly, if you don’t look every day, you’ll be less inclined to take impulsive actions, like selling off in a panic or trying to time the sell outs with the buy backs.    Over the long run, in spite of the rapid declines followed by the rapid gains, you’ be entitled to receive that long term rate of return. Building that successful portfolio is like losing weight. Don’t watch the scale every day and don’t watch the market every day.  Create a strategy, write it down and execute the strategy faithfully.  When things do not seem to be going your way, refer to the plan that you wrote down.   You’ll be less inclined to make hasty, harmful decisions! 

May all your financial endeavors be successful.

Entry Filed under: Investments