Go Team USA!

Watching the USA vs Portugal match at Fado’s Irish Pub on Sunday got me thinking about how much we really hate to lose. Yeah, I know we didn’t lose, but for the several hundred of us who chanted “USA, USA, USA” for two hours, that last minute draw sure felt like a loss.

This strong dislike of losing is called loss aversion.  And we’ll do most anything, rational or not, to avoid it. Research shows that we actually feel the pain of a loss much more intensely than we feel the pleasure of a win.

As it relates to investing, this aversion to loss often causes us to make poor decisions. Have you ever held on to a losing investment for longer than you should have, just hoping for the value to come back to at least what you paid for it?

Let’s say you’re in a casino and are losing money. Do you leave or do you try to dig yourself out of the hole by continuing to gamble? What tempts you to stay is loss aversion. You really don’t want to walk away from the table and accept a loss.

It’s interesting that investors who check their portfolio less often actually achieve a higher return on their investments than those who look at it more often. Again, the reason is loss aversion. If you scrutinize the value of your investments daily, and you see them dropping for several days in a row, you’ll feel the urge to sell just to stop the losses. And this will usually be a mistake. It’s one of the main reasons that when investing, individual investors tend to buy stocks when prices are high and sell when they’re low.

The Vanguard Group has done research showing that financial advisors on average add about 3% in annual returns when compared to individual investors without an advisor. And half of this benefit (1.5%) comes just from “behavioral coaching.” In other words, helping the investor avoid the temptation to buy and sell at the wrong time.

In investing, it’s important to formulate a good strategy and then have the discipline to stick to it. Just like Team USA!

Contact me today if you would like to discuss developing a strategy for your investment portfolio.

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