Despite the fact that I attribute the above quote to “almost everybody’s grandma,” I was actually introduced to it in my high school chemistry class. It refers to the fact that, while you’re cooking, a pot water seems to never come to a boil when you’re looking at it; it’s only when you go about your other business in the kitchen and look away that the water comes that nice rolling boil, and you’ll be ready to salt that water and cook some delicious pasta.
As for my chemistry class, we were about to get a lesson on the mechanics of boiling water. You see, it turns out that it isn’t as simple as just bringing water to its boiling point of 212° F (100° C). At 212° F, water can still exist in it’s liquid form; there’s still another step involved that requires you to continue adding energy/heat to that stubborn pot of water in order for it to become gas/vapor.
Basically, the structure of water molecules allows them to behave as a bunch of tiny, relatively strong magnets each other. And, it requires a good deal of energy to break that magnetic bond that holds water in its liquid form and come to a nice rolling boil.
Even with this nice little lesson from my high school days, that “watched pot” quote always struck me as odd. Why would it need to be said? I mean, who would watch a pot of water while they’re cooking when there’s so much else you could be getting done?
And, why don’t I think the same way when I think about my investment portfolio?
A Little Too Attentive
Yes, it’s true. As a stock market junkie, I had a tendency to check on my portfolio and net worth a bit too often. I have software that gives a nice quick summary of those values, so it’s not a huge time drain for me.
But, still, there is a temptation to make those portfolio and net worth values become the goal when the true goal should be your process behind those numbers.
Just as you’re better off in the kitchen when you’re taking care of more important things than watching a pot of water come to a boil, you’ll be better off focusing on the skills you need to build your business, become better in your career, or work on that side job/business.
If you ever get caught up in portfolio or net worth watching (I’m most likely to catch the bug when those values are close to a nice, round number.), you’ll notice that there’s not that much of a change day-to-day, week-to-week, or even month-to-month.
Just as a pot of water takes some time and a lot of energy (heat) to come to a full boil, our investment portfolio also takes a lot of time (years instead of minutes) and energy (work and savings/investing) to really get going. Despite knowing that fact, and having a good understanding of how compound interest works both in the early and late stages of the process, why are we (or, why am I, at least) still tempted to check the numbers from time to time, and have no temptation to watch water boil?
If you’re anything like me, your more likely to check on investments in the early stages after you’ve opened the account. I like to keep up with new processes to make sure they’re working the way I want them to. Unfortunately, when it comes to investing, the process does NOT work how we would technically “WANT” it to in a couple of ways.
Specifically, we want it to work quickly in an upward direction, and we want it to be somewhat linear. Money and wealth-building work in neither of those ways.
To illustrate, let’s look at an investment strategy over 40 years (your cookie-cutter career length) that will get to a little over $1,000,000. (Note: $1 million is an arbitrary number I pulled out of the air; that number doesn’t necessarily mean anything in relation to your goals.) What we are going to is put in $325 per month for 40 years into an investment strategy that returns 8% per year. (8% is a return that I think is a reasonable expectation, but I basically pulled that out of the same air the $1 million came from.)
So, what we have as our plan is:
- Contribute $325 / month
- Get 8% return on money
- Do this for 40 years (an age 25-65 career)
- End with $1,046,851.
Now, let’s look at where we are at various points on our journey (yellow) vs. what we might actually want (green) vs the instant gratification we think would be nice (blue).
As you can see, it doesn’t really pay to watch your portfolio like a hawk. Looking at the graph above, things don’t really get cooking until we’ve worked the plan for about 25 years.
So, What’s the Point
When it comes to boiling a pot of water, and it isn’t heating up as fast as we’d like, our natural inclination is to turn up the heat. And, turning up the heat on a pot of water is usually an efficient thing, as long as you’re not neglecting other aspects of the dish you’re cooking. It also helps that stove manufacturers only give one dial to turn to accomplish the goal of heating things up in a more timely fashion.
But, when it comes to our money, we are given a lot of different ways to try to turn up the heat. For instance, we might decide that there’s room in our cashflow management system to increase our savings rate. If done within reason, meaning you’re not neglecting other areas of living your life, this is a good way to make sure your financial plan stays on track.
Unfortunately, not everything that occurs to us in terms of fueling our investments is good for us. If we check up on our investment balances too often, we’re tempted to move money around to investments that have “gone up more.” If we combine this with seeing our friends and neighbors (or strangers on TV) getting rich faster than we are, we might try to duplicate what they’re doing (or what they’ve done).
While it’s OK to tweak your plan if you calmly determine that it needs some adjustments to fit your goals, values, and personality (risk tolerance), the types of adjustments that come from our moods after checking our portfolios tend to hurt more than help.
You’ll be better off if you set it and…set a time to review it.
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