The distant future may feel full of uncertainty, but envisioning the long-term in rich, exciting detail can empower you to take financial action

A 2021 study showed that people who think at least 10 years ahead – no matter their income level – save significantly more than their peers. But many Millennials, when we consider our future selves and our necessary investment time horizon, don’t think nearly far enough into the future.

Welcome back to Financially Well, the finance podcast for Millennials. “When you think about your finances, how far into the future do you tend to think and plan?” Sarah Newcomb, a behavioral economist at Morningstar, asked this question in an article she wrote late last year.

One Reason Why Millennials Feel Frustrated About Investing

Many of the Millennial parents with whom I work want to invest more. They want to invest more money and invest more consistently. Ultimately, they’re trying to give themselves and their family the lives they desire. And they typically understand that, in order to make those ideal lives possible, their investment time horizon needs to extend beyond a few months or years. But even among the most dedicated, investing never seems to become simple or straightforward enough.

Why is that?

For many Millennials, external factors, such as high housing and child care costs, play a significant role in investment frustrations. Let’s optimistically assume, though, that you reach a stage in life at which the biggest barriers to your financial progress no longer look so daunting. Saving and investing consistently starts to feel rather easy, right?

Maybe. But many Millennials get frustrated that, even under more ideal circumstances, investment consistency still seems to elude them. A primary reason, according to Newcomb’s study, is that we don’t devote enough time and energy to forming a clearer picture in our minds of what we want our distant future to look like.

What is an Investment Time Horizon?

Your investment time horizon, Investopedia writes, “is the period of time one expects to hold an investment until they need the money back…. The length of an investment time horizon will determine what types of investment products are most suitable for the investor’s goals. Typically, investors seek stable assets for short-term investing. Riskier investments are more acceptable on a longer-term investment time horizon, since markets overall tend to trend upwards.”

Ideally, your default approach to any investment strategy would give at last equal weight to the three main investment time horizons – short, medium, and long-term. Even better, you would devote the most attention to your long-term investments, since those dollars will have the most time and opportunity to grow (and compound).

But Sarah Newcomb’s study revealed that “most people, regardless of age, income or education, reported thinking several years ahead at most.” And “in every income group, people who think at least 10 years ahead had saved significantly more than their peers who [focused on] a shorter…time horizon.”

She noted, “This may help explain why so many people struggle to save, invest and adequately prepare for their future. If you’re not even thinking about it, why would you plan for it?”

How Our Human Tendency to Act Conservatively Impacts Our Finances

Newcomb’s study doesn’t address why many people don’t favor a long-term investment time horizon. But Dr. Daniel Crosby’s book, The Behavioral Investor, may offer some insight into why we allow our “mental picture of the future,” as Newcomb describes it, to remain “fuzzy or unformed.”

In many aspects of our personal finances, we often act too conservatively. Despite our best intentions, we’re vulnerable to natural human tendencies that we’ve developed over thousands of years. Specifically, we’re inclined to be conservative because we:

• Seek to avoid regret; and
• Fear loss more than we seek gain.

“Whatever the specific psychological underpinnings, the pitfall of our natural conservatism is universal; it keeps us stuck. In an investment context, this can look like everything from holding [losing investments] too long, to failing to rebalance, to underallocating to [assets like stocks], all the way to a more general paralysis.”

When you think about the state of your personal finances, you may find yourself dreaming about positive potential changes. In your mind, you may understand the value to you in investing in more diversified investments, negotiating for a higher salary, or strategizing for a lower tax bill from the IRS.

But these ideas may only rarely turn into action in real life. Why?

Regret Avoidance

You’re more likely to do nothing differently at all in order to avoid any regrets. Crosby explains why we ultimately choose the status quo:

Psychologists Daniel Kahneman and Amos Tversky discovered that “individuals feel stronger regret for bad outcomes that are the consequences of new actions taken than for similar bad consequences resulting from inaction. Action begets feelings of culpability and taking responsibility for uncertain outcomes is a hard pill to swallow.

If Investor A makes dramatic changes to her portfolio before the market drops 20%, all else being equal, she will feel worse than Investor B, who might suffer a similar loss but had not made recent changes to her holdings. Investor A will feel more responsible and that responsibility hurts.”

“Many investors take the ostrich route to investing, burying their head in the sand and hoping that nothing bad will happen. While the impulse toward complacency is understandable, the sting of the poor financial results it produces is in no way lessened.”

Loss Aversion

Similarly, Crosby writes, “It is perhaps the most widely disseminated finding of behavioral finance that our risk and reward preferences are asymmetrical and that we care far more about avoiding loss than we do about achieving gain.”

More money sounds wonderful, in theory, to almost everyone. But when we’re presented with the risks and trade-offs that accompany investment growth or a salary increase, many people opt to stick with what they have and know. This includes shying away from the uncertainty that a long-term investment time horizon necessarily includes.

To an outsider, we may look completely irrational. But such decisions actually stem from how our brains respond to the two different possibilities. Stanford University researcher Russell Poldrack and colleagues found “enhanced activity in the reward circuitry of the brain as gains were made, but even stronger responses to potential losses.”

Two Steps to Expand Your Investment Time Horizon

Human beings make, on average, about 35,000 decisions each day. 

As Dr. Crosby writes in The Behavioral Investor, “Making that many decisions sounds exhausting and, indeed, the research supports that it is. This leads us to disproportionately stick with the familiar.” In fact, he notes, “when considering decisions as diverse as voting, making business decisions, choosing health insurance, and managing retirement accounts, [researchers] have found that we overwhelmingly default to the status quo.”

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“People who think at least 10 years ahead – no matter their income level – save significantly more than their peers“

Sarah Newcomb

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So can you turn this awareness into financial progress? How can you reduce friction for yourself when you want to save and invest more consistently?

Behavioral economist Sarah Newcomb notes that, “it’s much easier to change a mental habit than to change one’s income, education, age or other factors we typically associate with financial health.” But more specifically, she suggests the following two tactics:

1. One step at a time

Let’s say you currently think about how your investing decisions will impact your life five years from now. Instead, try increasing your investment time horizon to 10 years. You don’t need to reference your perspective by decades immediately.

2. Fill the picture with details

When you envision your future self, aim to become as specific with details as possible. If you’re interested in traveling more often when you’re older, don’t just picture yourself on an airplane bound for Europe. Identify the exact neighborhood you’ll stay in; think about what you’ll order at a local wine bar; imagine the weather when you’re touring a singular historic site that you’ve longed to visit. This exercise will anchor your investment time horizon to a very tangible, achievable goal.

Embrace the Idea That Thinking Ahead and Uncertainty Can Co-Exist

I arguably stress one investment idea to my Millennial clients more than any other. You don’t need to know with exact certainty how you’ll use the dollars you’re investing. This is one reason why I love basic, taxable brokerage accounts. In many cases, you have flexibility that tax-advantaged retirement accounts don’t offer.

But just because you lack certainty doesn’t mean you can’t think in rich, exciting detail about your future. Your plans can change, and they almost certainly will. But start somewhere, with some vision. As Sarah Newcomb says, all of her data “points to one important fact.” The “simple act of thinking ahead may be one of the most important things you can do for your financial health.”

Thanks for listening to the Financially Well podcast.

[Editor’s note: this article reflects the transcript (which I’ve edited for clarity) of a recent Financially Well podcast episode.]

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About Kevin Mahoney, CFP®

Kevin Mahoney, CFP® is the founder & CEO of Illumint, an independent firm in Washington, DC that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and early 40s, such as repaying student loans, buying a house, saving for college, & investing for the future. In addition, Kevin also leads a financial wellness benefits program for Millennial employees around the country, including group speaking engagements.