This is as good a time as any to discuss myopic loss aversion, a trait that will no doubt lead investors to make decisions they will regret. Most investors have – or should have – a long-term investment horizon of at least 10 years, even if they are retired. Investors with a long investment horizon should not be influenced by short-term market movements or news that is interpreted to be deleterious to stock prices, but myopic investors are. With regard to investing, myopia is a behavioral bias that influences many investors to take a short-term view of their investments. This causes undue stress for investors, could cause them to trade more often and abandon their long-term investment strategy as they respond to short-term events.
Considerable research has been conducted on myopic loss aversion. Investors who check their portfolios more frequently take a less than optimal amount of risk and earn lower returns. Loss aversion is a behavioral bias that makes losses hurt about twice as much as similar sized gains make the investor feel good. In other words, one who loses $100 will lose more satisfaction than another person will gain satisfaction for a $100 windfall.
Investing in particular requires a long time to work well. Of course, the long-term feels like an eternity to live through in the midst of inflation, rising interest rates, slumping stocks, and a very troubling conflict in Ukraine. But the most basic parts of financial theory and the financial system look good when you allow them time to work, despite these many travails.
Smart Money Tips
- Is it time for your annual insurance checkup? We should all check to make sure our insurance coverage is adequate every year. This is as good a time as any to spend some time reviewing your insurance coverage. If you think the cost of living is high, that’s nothing, compared with the cost of an uninsured or underinsured loss. Most people are underinsured in some areas and overinsured in others. The trick is to “invest” the money you save from eliminating unnecessary policy features into areas where you need to acquire or bolster coverage.
- Be sure to include your digital information in your estate plan. Most estate planning documents are seriously deficient insofar as they provide little or no digital information. In the old days, all of our important records were on paper. Now, a substantial amount of financial and personal data resides on a computer, the Internet, etc. etc. If you were to die or become disabled, would your family or other loved ones and your executor know of and be able to access all of your digital information? Probably not, so it’s time to start summarizing this vital data and informing interested parties about where it is located and how to access it.
Food for Thought
That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise.
Money Can Be Funny
Don’t take life too seriously. You’ll never get out alive.
Word of the Week
misoneism, misoneist (mis-oh-NEE-iz-uhm) – hatred or intolerance of anything new
Origin: From Italian misoneismo
“We’ve never done that before” are the code words of a misoneist.