Loss Aversion or Floss Aversion - I'm Here For You!
Some more thoughts from my journey of getting certified in Applied Behavorial Finance ...
I’ve learned about Daniel Kahneman, who was awarded the Nobel Prize in Economics in 2002 for his work in this field. Kahneman, along with colleague Amos Tversky, coined the phrase “loss aversion” to describe how the pain of losing money is greater than the satisfaction of making it.
Don’t worry, academic life hasn’t changed me. My first thought upon hearing this theory was, why do behavioral scientists have such bad teeth? Floss Aversion.
So, loss aversion, floss aversion, let's cover both!
Loss Aversion: How to Lessen Anxiety
- Diversify. A diversified portfolio reduces stress because not all of your eggs are in one basket. Growth in one area can offset a setback in another. Another benefit of "owning the haystack, not the needle"— you will always have bragging rights over Uncle Harry because you owned the area of the market with the best performance.
- Think long-term. Let's look at the S&P 500 Index from 1926 to 2020. On any given day, the chances of positive performance were 56%, while negative performance was 44%. Kind of like flipping a coin. But over five years, 88% of the time you would have made money, and over ten years that rises to 95%1. So hang in there and don't get caught up in day-to-day or week-to week worries. (I know, it's not always easy, but a good advisor can help. Hint: email@example.com.)
- Understand risk tolerance, your ability to handle the inevitable downturns that come with investing. We need to sleep well each night to get to that long-term performance. A balanced portfolio, diversified with cash, bonds, and stocks, and tailored to your risk tolerance, will help lower stress and reduce the likelihood that you will "bail out" at the wrong time.
- Tune out the noise. Turn off CNBC. Redirect your conversations with friends and family to something less stressful. Perhaps politics. Remember, no one has a crystal ball. Well, it's ok to continue to have coffee with Uncle Harry and hear about his winners, but we both know he never will talk about his losers ...
Floss Aversion: How to Lessen Anxiety
The American Dental Association recommends cleaning between your teeth daily with an interdental cleaner like floss to prevent cavities and gum disease. But it's not always easy... So here is their advice2:
- Talk to your dentist, and try different options until you find the one that works best for you. For example, dental picks might help you get to hard-to-reach places. Water flossers might be a good option if you have trouble flossing by hand or have dental work that makes flossing difficult.
I hope my tips will not only help you with a healthy portfolio but a beautiful smile as well!
Shari Greco Reiches
Shari co-founded Rappaport Reiches Capital Management with one goal - to maximize the return on life for her clients. Please connect with Shari below. She loves to talk about investing, financial planning, and Barry Manilow.
The author does not intend to provide investment, legal or tax advice as these materials are for general educational purposes only. Please consult your legal, tax or investment professional for advice on your particular situation. This material is derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. It is not intended to be a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. Investing involves risk including the possible loss of principal. Past performance does not guarantee future results. Please refer to RRCM’s Form ADV Part 2 for additional disclosures regarding RRCM and its practices.
1. Copyright 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Past Performance is no guarantee of future results. Indices are not available for direct investment.