Experience may be the best teacher, but that doesn’t mean we are all the best students. Many times, there are lessons we only grasp later in life once we’ve made the same mistakes over and over again.
It has been said if you want your kids to learn about taxes, you should eat a third of their Halloween candy. However, if you want them to learn about the stock market and avoid some mistakes down the line, you might want to consider teaching them these lessons instead:
Lesson 1. Due diligence, and having a plan
Trick or treating is not just about knowing the couple houses that hand out full-size candy bars or knowing to avoid the dentist’s house. We learn there can be streets of houses in close proximity where everyone is home and giving out candy, which reduces walking time. We might learn that seniors are the most likely to be at home handing out candy, or that some folks are very chatty while others are not. We might learn that houses with more decorations are more likely to have someone home with candy than others. We plan our route, and thus maximize our initial haul.
Observations enhance our ability to be better trick or treaters over the years, and we need to observe the stock market to be successful as well. It is possible to get lucky, choose a random stock, and have it be a big winner. However, it’s also possible to walk down a street and knock on every door and find out that street doesn’t have anyone handing out candy. Most investors are not comfortable just guessing or relying on luck. There are many factors to consider before buying stocks or bonds. How much of each is appropriate? Should one buy stocks, mutual funds, or some of each? What is the time horizon for the portfolio?
It is easier to plan for trick or treating than it is to build an investment portfolio, but carefully creating a strategy can be the difference between a small haul and a great one.
Lesson 2. Gains from trade
Those with siblings often experience their first marketplace haggling experience at Halloween. Even those without siblings may experience haggling with friends using Halloween candy at the end of the night. That wonderful moment when each child dumps out their candy to see what they’ve brought in and finds things one likes that the other does not.
There are many lessons here, like learning to count and keeping track of everything, but the most important is that the sum is greater than its parts when it comes to the marketplace. Because we have individual preferences and tastes, it is possible for two people to trade two commodities (or a commodity for money) and both be happier than when they started. They create additional value by participating in the trade.
For individual investors in the stock market, we don’t know who the person is on the other end of the trade, but we can use limits and market orders when we buy stocks. A market order will say you want to buy or sell the stock at any price, so your broker goes and finds the best available price at the current time. On the other hand, a limit order will say you are willing to buy or sell the stock at a particular price and not to execute the sale unless there is a buyer or seller at that price.
While there are advantages to both kinds of stock trading, knowing how much you are willing to give up in order to get what you want is good information to have.
Lesson 3. Delaying gratification
Many people want instant gratification. They may binge the Halloween candy, and it’s gone all too soon. Then they see their sibling or classmate, who started out with a similar amount of candy, a month later still enjoying it a couple pieces at a time. They say next year will be different, but it’s hard to cultivate those types of habits. It might be easier when it comes to the stock market, because the delayed gratification provides compounding returns.
One way to delay gratification in the stock market is to reinvest dividends rather than taking the income. If a company has a dividend reinvestment program (DRIP) you can set it and forget it. Every time a dividend is issued that cash is used to buy a little bit more of the stock, which also pays dividends in the future. In this simplified example from Investopedia, the gains from investments over 20 years increased by 47%.
Halloween trivia to share
While it may not be all about candy as an adult, Halloween is significant for many Americans throughout their lives. According to the National Retail Federation recent press release, 69% of Americans plan to celebrate and they plan to spend over $10.6 billion total. They will be handing out candy, decorating their homes, and dressing up themselves, their kids, and even their pets (with a projected $700 million spent on pet costumes). If it is still all about candy and you want to make sure you’re handing out your state’s favorite – check out the list of favorite candies by state on candystore.com here.
Experience may be a great teacher for how to get the most out of Halloween, but sometimes we want to learn from other people’s mistakes instead of our own. That is where relying on industry experts can be helpful, folks who already know the best practices and can put them to use on your behalf. If you’d like a second opinion on your stock portfolio, we’d be pleased to provide one. Contact us or schedule an appointment by clicking this link.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
© 2021 M.A. Co. All rights reserved.
Arvest Wealth Management does not offer tax or legal advice – consult a professional.