“The investor’s chief problem – and even his worst enemy – is likely to be himself.”– Benjamin Graham
Market declines are unpleasant and stressful, so 2022 was particularly challenging for investors. As we have said many times – and as empirical evidence supports – the best way to handle a broad stock market decline is not to sell in a panic but rather to remain disciplined, ride out the storm, and wait for the markets to turn.
Unfortunately, human psychology is ill-equipped for such discipline and patience. You might tell yourself that you make financial decisions using a calm, rational process, but humans are far from entirely rational. Intuition and emotions often influence or completely override reason, leading investors to sell in a panic when markets are falling.
Because emotions are apt to lead you astray in a volatile market environment, actively managing your psychology is more important than actively managing your portfolio. You have no control over the direction of the market, but you have a high level of control over how you feel about it, so if you manage your emotions, you have far better odds of being a successful (and happy) investor.
“…actively managing your psychology is more important than actively managing your portfolio.”
See no evil, hear no evil…
So how do you manage your feelings about markets? You do it by managing what you see and hear about them. For most people, the pain of a financial loss is more profound than the pleasure of a gain of similar magnitude. Some studies even claim that losses affect emotions an average of twice as much as gains do. So, try to manage your psychology by looking at your portfolio less frequently; this will maximize how often you see gains and minimize how often you see losses.
How does looking at your portfolio less frequently do this? It works because stocks are far more likely to be higher over long time periods than short ones. Specifically, the probability that the stock market is higher on any given day is 54%, so if you look at your portfolio daily, you are just about as likely to be happy as sad. Stocks are higher 66% of the time on a monthly basis and 79% on an annual basis, so, if you discipline yourself to look at your portfolio less frequently, your odds of observing gains will rise significantly, and your investment psychology will be in a better place.
Head in the sand?
You might have heard that ostriches bury their heads in the sand when they feel threatened. Although the real reason why they do this has nothing to do with fear (and everything to do with underground nests), burying your head in the sand out of fear might not be a bad idea in certain contexts. In fact, you can help manage your investment psychology and your general stress level by turning your gaze away from the endless barrage of financial and geopolitical news that is the underlying driver of the markets. Of course, you should still keep up with current events, but doing so in small doses at the right times will improve your mental state. Consider avoiding the news right before bedtime, disabling stock quote and ticker apps on your phone, and being more deliberate about the information you consume, whether you actively seek it or are passively bombarded by it.
We know one professional investor who has his family immediately turn off the TV when they hear him come home from work in the evening. As a result of not watching or hearing the news for a few blissful hours, he claims to sleep much better. You might not need to go to this extreme (or bury your head in your sofa cushions when you hear the prelude to your favorite news station), but by proactively reducing the messages you see and hear, you will be better equipped to deal with the markets’ inevitable fluctuations.
Your own worst enemy
Our favorite Wall Street Journal columnist, Jason Zweig, once wrote, “Investing isn’t about beating others at their game. It’s about controlling yourself at your own game.” We completely agree.
Being a successful investor is relatively simple: Spend less than you earn, invest the excess, and leave it alone. Repeat until wealthy. This is simple advice, but it is not easy.
Actively managing your investments is tempting, but the outcomes are usually undesirable, especially if your decisions are based on your emotions. Instead, focus on actively managing your psychology by looking at your portfolio less frequently and avoiding excessive exposure to the news. These recommendations might seem obvious or even flippant, but implementing them will help you sleep better at night, and the longer you follow them, the more likely you are to have a happy outcome.
Heritage Investment Group provides wealth management and investment guidance to high-net-worth individuals, families, charitable foundations, and qualified plans. We provide seasoned financial guidance backed by a disciplined investment process. For over 25 years, we have built our firm on a strong foundation of family and friendships with guiding principles of ethics and integrity.
The original version of this article was written by Heritage for the November/December 2022 edition of The Light, a local magazine serving Broward County, Florida.