The More You Look, The Worse You Feel
"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety), by menacing it with an endless series of hobgoblins, all of them imaginary."
- H.L. Mencken
H.L. Mencken might have been writing about stock market prognosticators, and not politicians.
If you have not looked at your investment portfolio, don't bother to look now. Apparently the markets are happy again. Your portfolio may have a gain since the Brexit announcement a few weeks ago. You might want to see that gain, so here's my prediction:
You'll look anyway.
Then, in a few days, you'll flip on the news and hearing of recent events, you will look at your portfolio, which will be down from today's value (again). You'll feel bad again. In fact, the more you look the the worse you'll feel.
This is normal. This too shall pass. Researchers have fancy names for this phenomenon, and one of them is Myopic Loss Aversion.
The more we look at our investments the more risky they appear to be. The more risk we feel we are taking, the less risk we want to take. The less risk we take, the lower our likely returns.
This week, Dr. Howard speaks with our clients about today's markets and investing with the power of dividends. He'll talk about, among other things, the most risky part of your portfolio. What do you think he'll say?
The most risky part of investing is you: in other words, your feelings. More accurately, the biggest risk is taking action on your feelings.
On any given day, the market is likely to go up in value, but only just barely. So the more you look, the more likely you are to see a loss and experience bad feelings. The bad feelings hurt twice as much as the good feelings feel good, or so say the researchers. And me, for that matter, purely from my experience working with people just like you.
Here's some math for you, in hopes that something academic might make sense of what is deeply emotional, and thus vastly more real.
On any given day, you have a 55% chance that when you look at the stock market, you'll see that it made money. When you make money, you give yourself one unit of happiness. However, when you experience a loss, you subtract 2 units of happiness.
55% chance of +1 happiness
45% chance of -2 happiness
Who's going to play that game and win?
The whole point of the stock market is to "keep the populace alarmed" so that only the long-term, patient investor can make money. All of the short-term news are hobgoblins.
If, however, you wait three months or a year, you have a much greater chance of seeing your portfolio go up in value...and over five years, or ten years, the odds of gains (and substantial gains at that!) are potentially even greater. The less you play the looking game, the better you feel.
Researchers, other than Dr. Howard, who head up our pantheon include: Richard H. Thaler, Amos Tversky, Daniel Kahneman and Alan Schwartz. All of them have written books, most of them have YouTube videos on the emotional effects of investing. Only Mr. Tversky predeceases us.
In brief, if you're looking, you're working too hard and it hurts.
So turn off the tube.