Maintaining your mental health as an investor.
As an amateur investor, it’s easy to fall into the trap of spending all your time watching CNBC, reading the finance blogs, and staring at the screen as your account balance rises and falls by 0.1% or less. There’s a thrill that comes with the risk of playing the stock market, and when the mental stimulation of attempting to predict the future of the economy pays off, it can feel absolutely electrifying. However, it might be hurting both your investments and your mental health more than you realize to spend this much time on your portfolio.
In behavioral economics, we talk about a concept called loss aversion.
Psychologically, this means that individuals feel a loss more heavily than they do an equivalent gain. Imagine it this way - if someone gave you a $50 bottle of wine, you might feel a bit of happiness, gratitude, and excitement to try the wine. However, if you already had a $50 bottle of wine, and dropped it on the floor, that loss would hit you much harder than the equivalent gain.
This has many real-world applications for investors, but the big one is this: checking your investments every day, especially long-term ones like retirement accounts, is a bad idea. Just like with that nice bottle of wine, the days where your portfolio goes up a few percent won’t feel nearly as good as it will hurt on the days it drops in value. Watching your portfolio go through repeated cycles of ups and downs every single day pulls your focus into a few dollars here and a few cents there, rather than the big picture.
And the big picture is this: through the 20th century, the equity premium was estimated at around 6%, and is said to be anywhere from 5-8% now. The equity premium is how much more the average equity (stocks) portfolio grows compared to a basic debt asset like a treasury bond. In the most basic sense, it’s how much your investment portfolio will grow if you just leave it alone, compared to having that money sit in an account somewhere to earn interest. Without aggressively playing the market or spending all your time on research and analysis, you could still be making an extra 8% per year if you simply chose a few long-term investments, left them in an account, and forgot about them.
Staring at your account is bad for your health.
Last year, the American Psychological Association reported that money was the top source of stress in the U.S., and it’s well documented that heightened stress levels cause a wide array of physical issues in the long run. With behavioral economics telling us that seeing those financial losses is a much bigger psychological hit than the subsequent gains, and trends over the last century telling us that the average portfolio will, at the end of the year, have grown despite those ups and downs, the lesson is that checking your accounts every single day might be hurting you more than helping. Beyond your mental health, loss aversion might be causing you to overestimate your losses, and frantically buy or sell to mitigate that perceived loss.
Take a breath, and let it ride.