I’ve noticed that most new investors, myself included, will check their investments every day, sometimes multiple times per day. If you only have index funds you’re setting yourself up for trouble. Although it applies to nearly any stock. I can tell you’re addicted, and it’s going to backfire if you’re not careful. Mainly because of loss aversion:
Loss Aversion is a psychological phenomenon where we value what we currently have MORE than something of equal value that we could gain. i.e. avoiding a $10 loss is psychologically more pleasant than gaining an additional $10. Consider if I approached you with this coin flipping gamble:
- Heads – I pay you $10
- Tails – You pay me $10
Would you participate? Most people wouldn’t, because the thought of losing $10 is worse than the benefit of gaining $10. In fact most people wouldn’t take the bet until the payout is closer to a $50 gain vs $10 loss. Here’s a video where a guy asked this of random people. Granted that $10:$50 ratio may have partly been because they thought it was a scam…
Investment losses are felt more strongly than gains
It’s great when your investments go up, but they’re also guaranteed to take a dive at some point. Now I know what you’re thinking – “yea but I can take it”. Are you sure? Are you really sure? Have you ever had literally thousands of dollars just disappear for nothing? It doesn’t feel good. Many people panic and sell everything in a desperate attempt to stop the money hemorrhaging.
Pull your money out it’s still dropping!
If you are ever thinking this phrase, or are told it by a friend, stop. Log out of your account. And do nothing. Back in December 2018 I had a friend tell me this, and had I acted I would have sold at the bottom and solidified some pretty serious losses:
Now of course I was tempted to sell. I desperately wanted to take some kind of action to stop my losses piling up. But I knew this was the time to go against my gut feeling, even though I was down thousands with no end in sight:
Obviously had I sold in December I would’ve missed all those juicy January gains. In retrospect I wish I had bought more, which is another thing to watch out for:
You’ll never be truly happy with your investment choices
If you’re constantly watching the market you’ll always be making the “wrong” choice:
- “I should have sold at this point”
- “I should have bought more at this point”
- “I should have listened to my gut and sold”
- “Good thing I didn’t listen to my gut and bought”
- “I should have bought shares of company XYZ”
If I didn’t check my investments regularly I wouldn’t have even noticed that drop in December. Yea sure it’s hard to avoid all news, but if you never see the sea of red in your account it doesn’t feel real.
Just Never Sell your Balanced Index Funds
If you own stock in a company that’s definitely circling the drain you should sell, but a balanced index fund should always bounce back. In fact the largest gains in the stock market are normally right after the largest losses, as seen from the graph above.
This is the beauty of index funds. You don’t need to watch them. It’s the ultimate investment for lazy people, just sit back and trust that they’ll go up in the long run. You don’t need to know the answer to these questions:
- Is the market going to crash soon?
- Should I invest in this exciting new industry?
- Is now a good time to sell?
- Is now a good time to buy?
With index funds you should have the same response to all of these questions:
I don’t know and I don’t care