Monthly Archives - August 2016

The man who bought a $30,000 couch

The man who bought a $30,000 couch

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management


1. : personal inclination: wish

2 : an intense longing: craving

We live in a consumer society, and lust is a powerful motivator.

There is something very virtuous about saying no to something you want NOW and putting off your desire to have it.

The Stanford marshmallow experiment provided interesting insight into the merits of delayed gratification. The marshmallow experiment was a series of studies on delayed gratification in the late 1960s and early 1970s led by psychologist Walter Mischel. Mischel and his team placed a number of children alone in a room at a table with a marshmallow in front of them. They were instructed if they did not eat the marshmallow, but could wait until the tester returned, they could get two marshmallows.

The agonizing period of time was about fifteen minutes. About one third of the children could delay the satisfaction with hilarious tactics to witness: talking to themselves, sitting on their hands, singing, etc.

The remaining two thirds simply could not withstand the temptation and plunged into the sweet and chewy lone marshmallow.

The fascinating piece of this study came years later when scientists followed up years later to see what had happened to these children. In follow-up studies, the researchers found that children who were able to wait longer for the preferred rewards tended to have better life outcomes, as measured by SAT scores, educational attainment, body mass index (BMI), and other life measures.

I often mention this study when talking to younger people and their money. The things you can do now to set aside funds can have so much greater influence on your options and net worth than if you were to upgrade to a fancier car, better apartment, or newer IPhone.

One example I remember from a friend of mine, when I was working at an investment bank in the early 90’s. Like many companies, our firm would give options or shares for being dutiful employees.

My friend and his wife wanted so badly to buy a $1,000 couch to match their apartment’s drapery and painted walls. With very little available cash, he sold off some of their available company shares he had accumulated. It was only about 18 months later that the stock of our company rose by a factor of 30.

Long after they moved from that small apartment, he refused to sell or trash this now faded and threadbare loveseat. He would, in a humble manner, lead guests down to the basement’s TV room and ask them if they would care to sit on a $30,000 couch.

This is not say one should live like a monk. But, if you sense you may be that child who would dive into the single marshmallow to have immediate satisfaction, keep this in mind when you find yourself rationalizing your next purchase.

And consider investing that same amount instead.

The stock market averages 9 percent returns. The average investor averages just 5 percent. Here’s why.

by Jay Handy, CEO of Walnut Capital Management and SignalPoint Asset Management

Here’s an astonishing fact:

Between 1928 and 2014, the average return of the S&P 500 was 10 percent per year. The average returns for investors with money in the market over that same timeframe was just 5.02 percent.*

That’s an incredibly poor average performance given the performance of the market over the same time frame! Why do investors leave so much money on the table?

bar-chartIn one word, emotion. Fear and desire take over the frontal cortex of even the smartest people I know and drive decision making when the market is at an extreme.

When the market is hitting new highs week after week, it’s easy to start checking your 401k two to three times a week while dreaming of an early retirement. It’s at this point in the cycle that people begin to buy more and more stock. And yet, these are the times when people should be selling some of their holdings or, at a minimum, rebalancing to a slightly more conservative portfolio. (When you’ve made a lot of money, it’s better to convert it into a form that will hold its value over time, whether that’s hard cash or shares that historically stay steady over time.)

At the other end of the curve are those times when the market has been decimated, and you should actually be adding to your holdings. (It’s like a clearance sale, in a way. When the price drops, buy!) Instead, the typical behavior in a struggling market cycle is to leave your portfolio statement unopened, tucked into drawer, and clinging to the dream that it will one day all come back. This isn’t actually a bad strategy either, as the stock market historically rebounds after a drop, given enough time. The people who stay in hiding are lucky people. Most people, eventually, will crack and sell out for cash.

In other words, most people in charge of their own mutual funds, driven by powerful emotions and good intentions, buy high and sell low. And by waiting for the market to recover before buying again, people miss the fastest growing days of the market.

Remember this: Over a period of years, it is not about “timing the market” but rather “time in the market.”

Depending on what decade you are looking at, the historical returns of the market can be between 8 to 11 percent. Those numbers are a seductive call to move into the market, but the reality is very few people achieve these returns because they thwart their own success by trying to time the market.

There are two primary things you can do bolster yourself and your finances:

  • Brace yourself and commit to buying more when the market drops and leaving your portfolio alone (or rebalancing to a more conservative portfolio) when the stock market soars.
  • Work with a financial adviser who can help you make the best decisions given the inevitable dips and swells of the market.

We provide the latter service, of course, and we’d love to work with you to set up a portfolio. Either way, keep educating yourself about finances so that when the market swings, you operate from a place that is logical and informed. We’ll be posting educational material here on a regular basis to help you out.

*Data based on the 2014 DALBAR Qualitative Analysis of Investor Behavior report