12/05/14Mortgages & Marshmallows

Mortgages & Marshmallows

Marshmallows… fluffiness of sweet cotton wool balls? they are the Marmite (other yeast extracts available!) of the sweet world. Who would’ve thought that this lovely sweet, served in a hot chocolate, or warmed on an open fire, could decide what sort of investor you are? There, how about that for a Segway!

According to an article in a Hargreaves Lansdowne brochure, Harvard university used the humble marshmallow as an experiment in the 60’s:

A group of children were put around the table and were given a marshmallow & it was up to them as to whether they ate it there & then, or, waited 15 minutes when they were given another one, If they ate it, they didn’t receive any more!

The study showed that there were three distinct groups:

  1. ‘I want it, & I want now’
  2. ‘I’ll wait…but I can’t wait so I’ll eat it’
  3. ‘I’ll wait 15 minutes’

OK, so these weren’t the correct group names, but you get my drift.

The theory, is that those who ate it straightaway, want instant gratification. I would say these are the spontaneous, larger than life characters, who will invest in individual stocks & Shares or quick gambling games to get that instant ‘hit’ so to speak. These investors in my view are unlikely to see out an investment for the long game, cashing in when a slight peak may occur.

The second group, were initial resisters. But succumbed! I think they set out with good intentions, but if the road got a bit wobbly, or there was a profit to be had & even though there was no initial requirement for the money from the investment-it was taken.

The third group are the determined bunch in my eyes, the ‘eye is on the prize’ & they will never wain. I see the third group as those who have invested previously & maybe got out like those in groups 1 & 2, but have gained experience from that.

So what was learnt from this experiment? well, clearly the longer you wait, the reward will come-providing you like marshmallows! Investments are to be treated as medium to long term i.e. 5yrs plus & as much as historical performance may show that a huge percentage figure was achieved in one year, we all know the old saying of ‘past performance is no guide to future values’ none of us drive our car forward, by the rear view mirror.

A client I saw this week, had received a healthy £50,000 redundancy payment & used it to pay off a chunk of his mortgage. at 53, he was delighted to that, as it freed up £400 per month & gave him much merriment down the local as he told all his friends. This got me thinking. Was this the right thing to do? would we put all our eggs in one basket? how easy will it be in todays climate, to ‘release’ some of that capital for say an extension? should he have used it to pay a smaller amount off the mortgage & kept the rest as cash, investing it, or keeping it for a rainy day?

With hindsight, this new client agreed that it wasn’t as cut & dried decision as he first thought. Especially as I’m talking to him in his office & his new venture is going so well now he needs new machinery, which could have been purchased by injecting capital in the business from his redundancy. Sometimes the answer isn’t the obvious one is it?..Mortgages & marshmallows in the same blog…who’d have thought it…

Have a great weekend & and enjoy Easter


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