Do you compare every day you live to the best day you’ve ever lived? I hope not… that sounds like a ticket to misery to me. How does this apply to investing?
Many investors have been measuring their account balances against the highs achieved by their account in early January. In the recent round of market volatility, many investors lost money that they didn’t have just 6 – 12 months ago, but it certainly hurts to see it go away, nonetheless.
Why does this happen? You can blame a cognitive bias called loss aversion bias. Loss aversion bias is a phenomenon that explains why individuals can feel significantly more pain around a loss than they feel pleasure around a gain. This goes back to our primitive brain trying to protect us from danger, but it can work against us in decisions related to our more evolved world.
How can you avoid it? Instead of focusing on short-term market fluctuations, set a rate of return goal for the long-term performance of your account. For example, let’s say you set a goal of 6% per year. It certainly not going to grow in nice neat amounts of 6% every year, but you can track your average return to see if you are near your intended average. Just as a person can have a bunch of bad days but still feel that it’s been a ”Life-well-lived,” you can have a lot of bad days in the market as long as you near your average return goal. If you experience a prolonged period beneath that targeted return, then it may make sense to make some changes in your overall strategy.
Truth is, it doesn’t take much to mess up a well-crafted financial plan. For this reason, we’ve chosen to focus our practice on helping clients with their behavioral choices around money. If you feel you would benefit from having an ally to help you make good choices when times are tough, please reach out to us.
