How Lessons from Giving Blood Can Make You a Better Investor – Visionary Wealth Advisors

How Lessons from Giving Blood Can Make You a Better Investor

John Fischer, CFA®, CFP® | Chief Investment Officer
November 19, 2018

How many people do you know enjoy being stuck by a needle? Whether it’s for a flu shot, blood work, or giving blood, most people aren’t particularly fond of getting poked with a sharp object.

So what should you do if you feel motivated to do something like donate blood because you know it serves an excellent purpose, but feel some degree of fear about the process? You can try what I do: don’t look.

I regularly donate blood because it makes me feel good to know my action could help someone in need. (Plus, there are the snacks and cookies you get afterward.) But I can only do this because I’ve trained myself to not look at the short-term discomfort of the needle going into my arm.

Instead, I focus on the important reasons I put myself through the process in the first place.

What Good Blood Donors and Good Investors Have in Common

The recent market fluctuations we’ve seen made some investors feel as though they were getting pricked with a figurative needle. While market volatility is a normal part of investing, the tranquility of the summer months made the recent ups and downs feel anything but normal, especially combined with the uncertainty leading up to mid-term elections.

The discomfort and even the fear we feel when we walk into a blood donation center or see the market take a downward turn can be very similar… but that suggests the solution can be similar, as well: look less.

I don’t look at the needle the nurse picks up nor do I look when they begin drawing blood. And when it comes to investments, I tend to look at my portfolio much less frequently when markets get volatile. I don’t want to see the bad news of the stock market sticking a figurative needle into my arm because I know looking more frequently increases the chances of poor investment behavior.

Both blood donors and good investors know better than to watch every single movement when they know some of the specific actions that are a normal part of the process cause pain or fear. Instead, they focus on the bigger picture or long-term goal to get through that short-term discomfort.

Where Science and Behavior Intersect

 The biggest obstacle most of us face to financial success is our own behavior. We often want to make all the wrong decisions at all the wrong times for what can, in the moment, feel like all the right reasons!

As children, we learn the instinct of pain avoidance very quickly.  When our finger hurts from being on a hot oven, the quickest way to stop the pain is to stop touching the oven.

It’s those instincts that makes investing more difficult, as our instincts tell us that we should stop investing (i.e., sell) when it’s painful.

Many investors sold stocks and went to cash in 2008-09 as the S&P 500 lost more than half of its value over an 18 month span. If an investor would have bought, or simply remained invested in the S&P 500 in early 2009 and done nothing instead of selling, they would have earned almost 18% per year including dividends reinvested to present time.

That’s almost double the long-term average return of the S&P 500.2

By looking less frequently at my portfolio when stocks are falling — which is when I would be most vulnerable to making an emotional rather than rational decision, and when I may be better off not taking any action — I feel less inclined to make the “wrong decisions” that so-often hinder our ability to achieve our financial goals.

Understanding Our Natural Aversion to Loss

Another reason why many average investors make poor choices at bad times is due to a cognitive bias known as myopic loss aversion.

Human beings are hardwired to feel a greater amount of pain over a loss than the pleasure we feel for a similar-sized gain. That natural loss aversion, combined with the habit of looking at portfolios more frequently, can make any investor more susceptible to making poor choices.

This isn’t just anecdotal. One scientific study1 proved this happens by splitting investors into two groups. One group got the assignment to make portfolio decisions on a monthly basis; the other group made portfolio decisions only on an annual basis.

The study found that investors who reviewed their portfolio on a monthly basis ended up with a much more conservative portfolio of 41% stocks and 59% bonds than the group who reviewed their portfolio on an annual basis, where investors ended up with a portfolio of 70% stocks and 30% bonds.

In other words, according to the study, investors who looked at their portfolio most frequently took the least risk and earned the least money in the long-run, regardless of the investor’s objectives, risk tolerance or time horizon. Why? The study suggests that by looking at their portfolio more frequently, those investors felt more pain caused by loss.

Seeing the Forest Through the Trees

Your goal as an investor is not to avoid all pain and ignore any market downturns. Rather, your goal should be to cultivate an awareness about your own behavior and how your natural tendency to react in different situations — especially situations that threaten you with losses — can create a significant effect on your success as an investor.

I don’t watch the nurse put the needle in my arm when I go to donate blood because I know by watching, it raises the chances of my bad behavior and increases the risk that I won’t achieve my ultimate goal of giving blood to save lives.

In other words, if I watch and feel that pain more acutely, I’m less likely to return to donate in the future.

In the same way, watching your portfolio in turbulent markets may increase your risk of making emotional decisions or reacting to loss rather than sticking to your strategic plan.

By making a concerted, disciplined effort as an investor to look at your portfolio less frequently (especially when it’s down), you can reduce the chances of making poor investment decisions and raise the likelihood of ultimate success in achieving your financial goals.

Source:    1 Thaler, R. H., A. Tversky, D. Kahneman, and A. Schwartz. “The Effect of Myopia and Loss Aversion on Risk Taking: An Experimental Test.” The Quarterly Journal of Economics 112.2 (1997)

2 Morningstar

 

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