Sometimes I use the analogy of baking a cake when it comes to investments. You mix up the ingredients and slide it into the oven. What happens if you pull the mixture out too early?
You end up with a glob of inedible dough. But if you leave the batter in the oven long enough to cook properly, you end up with a tasty treat.
Often, investors eager to check the progress on their cake end up taking it out of the oven too soon and too often, ruining any chance for a scrumptious dessert.
Some years ago, a young man moved overseas because of a job transfer. Shortly after he moved, he would send us a panicked email whenever his monthly investment statement showed a drop in value. He wondered whether we should be shifting his money around or getting out of the market. He was just very uneasy and concerned about the immediate future. Fortunately, the client returned to the States two or three times a year and came to see me. The preceding month hadn’t been a good time for the financial markets and his statement was showing a decline from the prior month. At the start of our meeting, I showed him two numbers—the first his starting account balance and, the second, his account balance as of the end of the most recent month. He could clearly see that his account had increased in value, despite the losses during the prior month.
Our client finally understood the importance of a long-term view.
He knew he had to let the cake cook properly — and is now enjoying the treat.
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