If you’ve ever opened a Youtube video about success or read psychology blogs, you’ve probably come across the term “instant gratification”.
There has been a lot of talk about how it affects our lives in general, but not so much about instant gratification and investing.
So, let’s see how instant gratification affects your investing.
What is Instant Gratification?
Before we can take a look at what effect instant gratification has on investing, we have to know what we’re exactly talking about.
Definition
According to positivepsychology.com, the concept of instant gratification revolves around the idea of seeking pleasure and avoiding pain. Because of this tendency, we tend to favour short-term pleasures over long-term goals.
So, as Queen put it: “I want it all, and I want it now”.
The interesting part is that we all usually know what we should do to reach our goals, but we don’t act accordingly.
We all know the benefits of being disciplined and working for your goals month after month, year after year. Yet, we often fail to do what is necessary.
The phenomenon is quite understandable since long-term goals are often rather abstract and hard to reach and visualize, whereas immediate pleasure is ours to take.
Back in the day, we used to tell ourselves that patience is a virtue. Nowadays the idea is to minimize the need for patience, and everything is expected to happen faster. We are used to getting almost everything immediately and are constantly pressured to take the easiest way out.
The problem is that letting instant gratification rule your life has many negative consequences.
Consequences
Achieving your goals requires constant short-term discipline. Without the discipline to act against the urge to resist short-term temptations, it’s extremely hard to achieve your long-term goals.
It’s quite difficult to develop patience and discipline when we’re constantly encouraged to take the easy way out.
Nowadays, we are more used to getting things immediately than ever before. Be it watching a movie, making food, or reading a book, we have a way of getting almost everything without patience or effort.
Movies can be streamed immediately, food can be ordered at your door, and books can be reduced to handy .pdf summaries.
So, the ability to withstand effort and frustration is declining rapidly.
I believe social media has advanced this phenomenon greatly. When we scroll through Instagram or whatever social media platform, not only do we get constant dopamine hits that alter the way our brain works, but we also get an unrealistic picture of where we should be.
Because we see the results, not the effort, we are feeling left behind before we’ve even begun. Achieving something requires constant effort with little results in the beginning. Instant gratification makes us expect results sooner than they would normally occur.
Delayed Gratification
The opposite of instant gratification is delayed gratification.
As you might’ve guessed, the latter is more useful, but a lot harder to achieve and maintain.
We’re not wired for delaying our pleasures. If there is a chance to get something instantly and with less effort, we are prone to take it.
As humans, we crave constant validation and positive feedback for our actions. This is why it’s especially hard to stick to your goals during long times of not getting positive reinforcement.
Think about your career, for example. Achieving your goals is rarely a linear pursuit.
When you start something new, it feels like you’re not getting anywhere. It usually takes a while to lay the foundation for success.
Then, when it rains, it pours. Once you start to achieve success in something, it begins to compound. This is why the rich keep getting richer, and why successful people seem to be successful in anything they do.
The effect of compounding works exactly the same way in investing as it does in life.
Marshmallows
To illustrate how important it is to develop a mindset for delayed gratification, we’ll take a look at an experiment about marshmallows.
Back in the 1970s, a psychologist called Walter Mischel conducted research on delayed gratification.
The setup was simple: Walter offered children either one marshmallow immediately or two marshmallows if they waited for about 15 minutes. Next, he put both the child and the marshmallow into a room with nothing in it but the treat and the child.
All the children showed interest in the candy, but only some of them ate it before the time was up. Others were putting aside the urge for immediate pleasure for better future results.
The really interesting part is, that after the initial experiment, they did follow-up studies that showed a significant difference between the children that were able to wait and those who weren’t.
Children with delayed gratification had better SAT scores and educational levels, had fewer weight problems, and were healthier overall.
So, if delayed gratification has such a positive effect on our lives, imagine the effect it has on our investments.
Instant Gratification in Investing
We have established that instant gratification and achieving your goals do not work well together.
Now, you may wonder, what does this whole thing have to do with investing? The short answer is: Everything.
Consequences
Because of instant gratification, we expect profits to come in faster and our portfolio to grow quicker than it should.
The thing is that in the long term, stock prices correlate with company growth. Most of the companies in the market grow gradually over a longer period of time. This means that the stock market as a whole will also grow gradually.
Granted, there are certain years when profits go through the roof, but usually they even out in the next couple of years.
When we think our portfolio should be doing better, we usually start to make riskier investments or stop investing entirely. In my experience, I would say that stock pickers start to make riskier investments and regular fund investors are more prone to stopping entirely.
In the end, it’s a matter of expectations vs. reality. If you expect returns to come immediately, you will be disappointed. When you approach investing with a longer time frame, it’s a lot easier to manage your expectations.
How to Overcome Instant Gratification
Time Frame
Although instant gratification is somewhat intrinsic, there are ways we can manage it.
The first step is to realize and accept the fact that we are inherently short-term creatures, and avoiding instant gratification requires a great amount of effort.
After admitting we’re not perfect, we can begin to practice ignoring our impulses – a successful investor has to learn how to control his mind. If you act on every buy or sell impulse you have while browsing the news, you’re heading for a fall sooner or later.
You have to remind yourself of your investing goals and focus on the big picture. For example, one bad quarter isn’t necessarily a reason to sell a stock that has been doing well for years.
It’s vital to realize the meaning of a long time frame. For a long-term investor, the time frame is decades, not years. When you start investing, you have to accept the fact that it takes longer than a couple of years to start getting the profits you’re after.
Discipline and Delayed Gratification
I would argue that discipline is one of the most important qualities an investor can have.
Being able to set aside momentary pleasures for long-term results is one of the main abilities that separates wealthy individuals from others.
The basis of investing is the fact that you have to be able to save your money to have something to invest in the first place. If we don’t have the discipline of saving a portion of our income, we can’t invest. Simple as that.
The same goes when you’ve already started investing. It takes a while to achieve results and there will undoubtedly be some bumps in the road. An investor has to be able to withstand the frustration and
Of course, to do this, you have to be certain that investing will eventually pay out.
For the stock market, it has always been so. The longer you’ve stayed in the market, the better off you’ve been. This is because on average, companies tend to grow over time.
Summary
If you want to be a successful investor, delayed gratification is the key. It’s important to realize that nowadays, it’s hard to develop a disciplined mind because we’re used to getting things immediately and with little effort.
This indicates that individuals who can overcome their need for instant gratification have a tremendous advantage over others.
The way I see it, in investing and in life, everything comes down to this simple formula: Time + Effort + Discipline = Success.
We can think about regular fund investing as a case study.
In order to begin investing, you have to pass on immediate spending to save money. Usually, money is the reward for your efforts that comes in a form of a salary. When you’ve put in the work, you need the discipline to invest month after month, year after year.
When you combine all the steps, you will eventually gain wealth. As we can see, delayed gratification is needed every step of the way. If even one of the factors is missing, the result will most likely be a failure.
The comforting side in all this is the fact that you can train your mind. The more you pass on immediate pleasures the easier it becomes.
When you’ve been investing long enough, you can’t imagine living in any other way.
