Like pain? Check your stocks more often
(MoneyWatch) Typically, people want to avoid pain. When it comes to investing, however, we seem to seek out such torment even though it can be easily avoided.
Studies show that we feel the pain of a loss twice as strongly as the pleasure of a gain. Just think about how you would feel about finding $20 on the ground. Now think about reaching into your pocket and finding $20 missing. Which one gets the stronger reaction?
It's natural that we would want to shy away from situations where we feel pain, but investing gives us a curious example. Just based on simple math, if we want to feel less pain, we should read our investment statements less frequently (and as little as possible).
Consider the odds of seeing a loss if you check your portfolio daily, monthly, or yearly. By checking daily, you're giving yourself about a 50 percent chance of seeing a loss from the previous day. However, the returns of the S&P 500 Index have been negative in only 38 percent of months (395 months out of a possible 1,039). Stretch it out to a year and the figure drops to about 28 percent (24 months out of a possible 86).
Before dismissing this as a minor phenomenon, consider that studies have found that losses lead to heightened autonomic responses, compared to equivalent gains. Professors Guy Hochman and Eldad Yechiam of the Israel Institute of Technology studied the effect of losses on investors and noted that losses spurred more intense physical responses, such as pupil dilation and increased heart rate. This was true even for people who weren't naturally averse to losses.
The lesson? The less frequently you check your portfolio, the more likely it is that you will be able to adhere to your investment plan.
Image courtesy of Flickr user Nathan Phillips
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