Christmas Cookie Investing
What could Christmas cookies possibly have to do with investing? I’ll get to that. But, first, let me share a story.
Because I’m less than a seasoned baker, I’ve had little to no experience baking Christmas cookies, just an extensive amount of experience eating them! However, being curious about the process of baking these delicious holiday treats, I wanted to find out just how it was done.
As I chatted recently with a few more experienced bakers, I asked what the key was to bake the perfect batch of Christmas cookies. The answers came back consistent. The first response was, “it depends.”
“What does it depend on?” I asked.
“It depends on the recipe or what type of cookie it is,” they answered.
“How about for a standard sugar cookie?” I said.
The responses were consistent: temperature and time.
Assuming one can measure and mix ingredients, or in my case, take the pre-mixed dough out of a package and place it on a baking sheet, the only remaining ways to mess up a cookie recipe is to bake at the wrong temperature or for the wrong amount of time. On the flip side, if you bake the cookies at the right temperature, and for the right amount of time, then the odds of getting delicious Christmas cookies are much greater. From my line of inquiries, I learned the typical baking time for sugar cookies was about 12 minutes and the proper temperature was around 350 degrees.
That’s when it hit me. A perfect analogy to investing popped in my head. So, I began to ask more questions.
“Imagine that I was baking my cookies at 350 degrees and I set my timer for 12 minutes. But, after about five minutes, the cookies just smelled so good that I couldn’t resist taking them out early to start enjoying them. Would they still taste okay if I did that?” I asked.
The responses were “absolutely not.” I was told that you can’t expect cookies to be ready after just five minutes. After just five minutes, they would still be gooey and sticky. “It takes more time for them become fully cooked and to taste right,” they said.
So, then I asked, “What if I turn up the temperature? Could I reduce cooking time if I turned the oven up to 450 degrees?”
Again, there were similar responses, usually with accompanied by a laugh. “No, it doesn’t work like that.” They said that if the temperature is too hot, it will burn the outside and leave the inside raw.
I could tell from my line of questioning that my train of thought was completely unrealistic. However, I must admit that even being the baking novice that I am, even I assumed that my “ideas” would not work out like I presented them.
In fact, I would guess that just about anyone who’s been around a kitchen knows that baking is all about proper ingredients, precise measurements, temperature, and cooking time. And, most people know that you can’t bake cookies for just five minutes and expect a good result.
The Investment Parallel
But what about when it comes to investing? Most people will say that they are investing for the “long-term.” However, even with that said, some will still panic and want to change their strategy after they receive less-than-ideal short-term outcomes.
For example, even though most people nearing retirement have an investment time horizon of 30 to 40 years (the rest of their lives) and will often choose a strategy that is based on that time horizon, some will want to change that strategy at the first sign of volatility. Essentially, they are evaluating a 30 to 40-year plan based on the results of a 12-month, 6-month, or even 3-month period. This is like expecting your cookies to be perfectly cooked after five minutes. It just doesn’t work like that.
Other investors will try to perfectly time the market, turning the oven up for certain periods of time and down for others, in hopes of taking a shortcut toward financial independence. They reason with themselves that if they can avoid major negative markets while participating in positive markets, they’ll end up getting to their goal faster.
However, as logical as it may seem, timing the market is something that no one has been able to do consistently and effectively over extended periods of time. Most end up missing out on positive markets as they sit on the sidelines waiting for the “big crash.”
We know what broad market returns have been over time. Because of this, we believe that if you, the investor, can remain consistent in your approach, you will have a higher likelihood of investment success, even if you experience a few major market corrections along the way.
What’s the Takeaway?
Not every cookie recipe is the same. The method varies on the specific type of cookie you are baking. The same is true for investors. No two households are exactly alike with exactly the same financial information and the same goals. Each situation must be treated as unique. In other words, the sugar cookie recipe is not going to work if you’re trying to make chocolate chip cookies.
Also, it’s common knowledge that a half-baked cookie is just not going to taste good. The same can be said with a half-baked investment strategy. If you don’t see the results after 2, 3, or even 5 years, don’t panic. If you are truly diversified and managing your costs effectively, history says that if you just stick around a few more years, you’ll start to see the averages play out. By giving your cookies more time to cook, you’re increasing your chances of a positive outcome.
And lastly, you need to set the temperature at the proper level from the beginning. Trying to raise and lower the heat based on a desire to take a shortcut just doesn’t work. Delicious cookies require consistency in the temperature. Successful investing requires consistency in the approach. Should you make changes here and there? Of course. Periodic adjustments and rebalances are important. But, trying to drastically change the strategy because of a short-term impulse isn’t the answer.
Although we can never predict the future, history has shown that over long periods of time, the broad markets have delivered a consistently positive outcome. The year-to-year returns vary, but as time passes, the average return begins to smooth out. Sometimes, it just takes more time to see it work.
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