Investing Pain

How to Reduce Your “Investing Pain” in Retirement

Is it possible that two different individuals can have the exact same investment allocation over a 43-year period of time, yet one experiences almost three times more investment “pain” than the other?

At first glance, you might think this is impossible.  If two individuals have the exact same investment allocation and they don’t buy or sell anything for forty-three years, shouldn’t they both experience the same amount of investment “pain?”

The answer will likely surprise you.

We recently examined stock market price movements during the “Great Recession” financial crisis between October, 2007 and March, 2009.  What this revealed was that during that 18-month stretch, if you “looked at” and experienced stock market prices on a daily basis, in addition to a lot of down days (54% of the days), there were also a lot of up days (46% of the days).

So, during that memorable 18-month market crash in which prices fell almost 57% from peak to trough (as measured by the S&P 500 Index), we also experienced prices closing up on 46% of the days!

Among other things, what that illustrates is that when dealing with markets, our experience is never a straight line up or down.  Instead, it’s more like: up one day, down the next, down the next, up the next, up, up, down, down, down, up, down, up……

That’s how we experience markets.  But, only if we “experience” them on a daily basis.

How Often Do You “Look”?

How often do you “look” at “the market?”  Or, your investment portfolio?

Be honest!

With technology and the financial media today, it’s not uncommon for Americans to not only look every day, but multiple times during the day.

We have all been conditioned by the financial media to “look” so you don’t miss anything and get caught.

Unfortunately, this is leading to a lot more pain in your life!

During the 43 years from 1973 through 2015:

  • Daily: If you looked at and experienced “the market” on a daily basis, you experienced prices being up 53% of the time, and down 47% of the time.  If you add up all those days, you will have experienced “pain” (i.e. market prices closing down for the day) for 20.3 years out of those 43 years.
  • Monthly: If you were “busy” and only allowed yourself to look at “the market” on a monthly basis, the percentage of time you experienced “pain”, (i.e. market prices closing down for the month), fell to 14.5 years out of those 43 years.
  • Quarterly: If you had the discipline to only look at your Retirement Bucket of investments every three months, the percentage of time you experienced “pain”, (i.e. market prices closing down for the quarter), fell to 11.8 years out of those 43 years.
  • Annually: Finally, if you disconnected from all media for all but one day per year, the percentage of time you experienced “pain”, (i.e. market prices closing down for the year), fell to 7 years out of those 43 years vs. 36 years in which the value went up.

What this demonstrates is that two different individuals could have had the exact same investment mix over 43 years of their lives, yet the one who “looked” at it daily experienced almost three times more pain than the one who looked at it once a year (20.3 years’ worth of the pain of market prices being down vs. 7 years).

There are a few conclusions we can draw from this data.

First, if we choose to follow the financial media the overwhelming majority of Americans and look at market prices and our investment holdings every day (or throughout the day), we’re setting ourselves up for a lot of completely unnecessary pain.

As the statistics and our experiences confirm, if measured on a daily basis, market prices move up and down a ton.  However, if measured over the long-term (which is what you invest for in the first place), market prices and dividends have increased substantially over time averaging 7% per year greater than the rate of inflation.

Second, we can’t delude ourselves into thinking that looking at it on a daily, weekly, monthly, or even quarterly basis will make you more knowledgeable, provide you with any signals to act on, or produce better results.  

In fact, as Dalbar’s 2020 Annual Quantitative Analysis of Investor Behavior illustrates, the average investor’s real-life results are significantly lower than markets have performed (while the S&P 500 index returned 9.96% annually over the last 20 years, the average equity mutual fund investor earned only 5.04%.)

How much of that awful investor performance do you think is attributable to and exacerbated by poor investment decisions brought on by “looking” at market price movements on a daily basis?

I would suggest a lot!

Finally, this does not mean that you should never look at market prices or your investment holdings.  As I suggested last week, go ahead and do so but during pre-determined periods of time, i.e. once a quarter, half year, or yearly so you can assess and rebalance your holdings back to your originally prescribed mix if necessary.

However, once you do so, go ahead and put it all back “in a drawer” and go about living your life.  Not only has history demonstrated that you will have better investment results, but you will also live a more enjoyable life!

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