If there were a simple thing you could do that saves time, costs nothing, and makes you happier while reducing anxiety over time, would you want to know about it?
Of course you would.
Be warned, though, this won’t seem intuitive. After all, if you are reading this you are likely a responsible person who works hard and keeps on top of important matters.
Here’s the counterintuitive advice: Stop looking at your investment account balances so frequently.
We’ll explain why in a moment.
When you visit our office or view our articles and posts, you probably notice fun illustrations about how to think about things like contentment and happiness. The reason: Psychology plays a massive role in investing. And it’s too often ignored, or worse yet, used against us by the Wall Street Marketing Machine.
All you have to do is turn on financial TV to see “Markets in Turmoil” specials every time the S&P 500 drops a few percent. It is so ridiculous, and only serves to sell ads and elicit fear and panic from investors. Then when a stock goes up big, that same network will stoke our natural “fear of missing out,” or FOMO.
They have zero regard for your best interests.
Let’s take a step back to consider your needs, rather than play on your emotions.
Here’s the truth: You invest for decades, not days.
Achieving your goals takes time and diligent planning. Still, we are all too often caught up in the day’s drama even when we know that short-term noise doesn’t matter. Media-fueled financial frenzy is so in-your-face that it takes conscious action to turn it off and focus on the big picture.
Social media makes it worse, too. Instant communication and efficient technology attempt to capture our eyeballs all the time, and that has very serious negative side effects.
I bring this up now because the stock market has had such a great run over the last few years, 2022 notwithstanding. It still has not been easy (it never is). We’ve been spoiled by strong returns. That’s caused many investors to more frequently check their investment balances to see how well they are doing. The problem is when those figures inevitably decline with the market, it causes folks to feel bad and then even make bad money choices. Always realize that your net worth is not your self-worth.
Losses are a feature of the market, not a bug. If you’ve saved $1 million, for example, your accounts might fluctuate by $10,000 or $20,000 per day! Seems like a lot of money, right? But compared to $1 million, those gyrations are more of just a function of how much you’ve saved. The percentage moves are normal.
Over time, we all know that investing works tremendously well for millions of people. It can do the same for you if you stick with the strategy of focusing on the long haul.
But the day-to-day moves are a toss-up.
Think of it this way: When you check your account after the market closes each day, you have just a 54% chance of seeing a gain. That means you also have a 46% chance of staring at a loss. During the recent bull market, many investors got in the habit of seeking out that dopamine hit of a higher account balance daily. Today’s technology makes it easy – after all your portfolio total is just a couple of taps away.
For me, a behavioral trap is to think about a drop in my investment account in terms of cars. Here’s what I mean – I might see a monthly dip of $x, and I’ll think, “I could buy x number of (modest) cars with that amount!” Behavioral psychologists call that “first-level” thinking. I take a mental step back, then realize how foolish it sounds – that's “second-level” thinking. We should all strive to be second-level thinkers when it comes to our finances.
Back to that 54%-chance number about the markets. Psychology also tells us the dopamine received from a positive emotion is only about one-half the amount of serotonin, the negative neurotransmitter, you get when you observe losses.
So we feel losses way more than gains.
That’s like flipping a coin, and on heads getting to eat a cherry gummy bear but then on tails lightly smashing your thumb with a hammer! Surely few in their right mind would play that game!
But if you understand the asymmetrical impact market movements have on your mood, that is effectively what we do when we check our balances too frequently.
The simple secret: check less. Simple, not easy.
Fraud Prevention Side Note
I advise all my clients to check their statements monthly to ensure nobody is stealing from them. Banks and custodians require that, too. When someone fraudulently uses your credit card, you must report those transactions promptly, or it is on you. Same with your investments.
I also tell clients to ignore the usual account value swings. It is just a distraction. That’s why our quarterly reports present performance in one-, three-, and five-year periods. Anything less is hardly relevant. It's the long-term trend higher that we invest in, not the gambles of the day-to-day moves. So ignore those big, boldface account values in red font. As the meteorologists would say, that’s just ground clutter.
If we nerd out on this further, the expected emotion is 54% multiplied by 1 positive plus 46% multiplied by 2 negatives. Do the math, and you will arrive at the sum of becoming a little sadder each day. Again, peeking at your net worth frequently feels awesome in big up-markets. When things naturally turn back to normal, checking your balance is less than pleasant. You might even feel like you did something wrong with your money. You didn’t.
This is a much better tack, and if you stick to it, then it should reduce the volatility of emotions around your investment and retirement cash flow plans. Consider that instead of a 54% chance of a dopamine hit, you now have a 67% likelihood of seeing a gain. There is just a one-in-three chance of incurring red numbers.
Let’s nerd out on the math again. 67% multiplied by 1 positive plus 33% multiplied by 2 negatives – that sums to zero, or neutral. Not great, but much less harmful than checking daily. Checking monthly is also much better than the cumulative effect of all those daily negative hits.
Better yet, we provide quarterly statements on how your investments are doing. Market data suggests that you have a 77% chance of seeing gains (and receiving a dopamine blast) when checking balances every few months.
Back to the fun math: The expected positive emotion is 77% multiplied by 1 positive plus 23% multiplied by 2 negatives. That returns a net-positive emotion, on average with the quarterly check-in plan. Moreover, training yourself to look less frequently results in short-term losses not feeling as bad since you are then conditioned to have a longer-term perspective. You essentially bank more positive memories.
We don’t come across many investors who have the fortitude to only check annually. But they are certainly out there. Aiming for this can greatly improve your financial mood.
A diversified investor has a massive 93% of seeing a gain by checking once per year. That’s 10 times the number of positive emotions versus negative ones.
How to Do It
Consider building good habits if you want to put these ideas into practice. Just like diet, exercise, and being proficient at your day job, success doesn’t happen overnight.
A good first step is to try to avoid logging into your brokerage account daily. More quick wins: Delete that stock trading app on your phone and shut off news alerts. Heck, even ignore the evening news. Remember that the Wall Street Marketing Machine spends billions of dollars each year attempting to get you upset and fearful so that you go into “fight or flight mode.” They want you buying and selling like a crazy person!
None of this is in your best interests; slow down the negativity cycle!
The Bottom Line
Being anxious at times about your finances and the market is normal. We all feel it on occasion. If you have concerns, we’d love to talk with you and, most importantly, review your retirement cash flow plan, among your other important goals. Always remind yourself that market drops are normal and are built into your financial plan already – volatility doesn’t mean you will not get where you want to go!
Thanks for taking a look!
Your ISC Team
Below is a practical visual* to further drive home the power of harnessing your emotions and psychology in your favor, not Wall Street’s.
*The precise chances of seeing gains or losses and good versus bad emotions are up for debate. Still, I assert the psychological tips mentioned above are very applicable. Emotions associated with checking your net worth are real and can be severely negative to your financial health.
Inspiration source: Brandes.com and “Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets” by Nassim Nicholas Taleb.