How a Positive Investment Return Can Make You Feel Bad

13.10.21 Investing By Josh Sweeney
Negativity Bias - How a Positive Investment Return Can Make You Feel Bad

These days, we have a wealth of information at our fingertips. So, checking your investments is easier than ever. But even with a positive investment return over the long-term, checking your portfolio too frequently can make you feel unhappy.

Humans have a tendency to not only register negative occurrences more readily, but also to dwell on those events. This psychological phenomenon is called Negativity Bias. It’s largely assumed this gloomy peculiarity stems from evolutionary survival instincts, where organisms that treat threats as more urgent than opportunities have a better chance to survive.

Loss Aversion is a manifestation of Negativity Bias in finance. Loss Aversion refers to the fact that losses cause a greater emotional impact than gains. In fact, losses are about twice as psychologically painful than gains are pleasurable for the same amount of money. These concepts come from the work of Nobel Prize winning psychologist Daniel Kahneman and his colleague, Amos Tversky1.

If the share market has historically headed up over time (as the chart below shows) why would checking your portfolio regularly make you feel worse?

 

A positive long-term investment return of the Australian Share Market can make you feel good

 

Over the long term, the share market has been overwhelmingly positive. In fact, there has been no 20-year period in the history of the Australian share market (or US share market for that matter) that has had a negative rate of return. As we look at shorter time periods however, things get a lot more volatile. Annual returns show Australian shares producing a negative outcome roughly two years in every ten. The chart below shows the sharp contrast of 20-year returns (green) and annual returns (blue). If you check the market on a daily basis, you have just as much chance the market will be up or down (almost – about 53% of days have experienced a gain).

 

Annual returns of Australian Shares can make you feel bad compared to positive 20-year investment returns

20-year returns have always been positive.

 

So, if you feel losses much more than gains, and the chance of a loss is pretty much the same as a gain on any given day, then checking the share market daily is going to produce a net negative feeling. Interestingly, checking monthly will still lead to a net negative sentiment. Checking investments quarterly (or longer) and keeping a long-term perspective, seems to be the key to a net positive experience when investing in the share market.

 

1 Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263-291.

 

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General Advice Warning: Any advice given herein is general in nature and has not taken into consideration your personal financial objectives, situation or specific needs. You should consider the appropriateness of the advice as it relates to you before acting upon it. Where a specific product has been mentioned, you should always consult the PDS before making any investment decision relating to it.

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