Three ways to become a happier investor by changing how your emotions affect you
Human emotion plays a huge part in how we perceive the world.
For instance, depression can come from having regrets about the past, and anxiety can result when worrying about an uncertain future. From an investing perspective, emotions can play an important role in how you build and manage your wealth, resulting in poor decisions and not being able to achieve your ultimate goals and objectives.
Here are three tips that we’ve found very helpful in preventing this from happening.
Stop comparing and do your own thing
It is in our nature to compare ourselves against others. Our happiness around money is linked to our position in society rather than our wealth in absolute terms. A 2010 study, Money and happiness: rank of income, not income, affects life satisfaction, showed that increasing your income will only increase your utility if your ranked position against others increases, too.
In February 1995, 257 faculty, students and employees at the Harvard School of Public Health responded to a survey asking them to choose one of two options: your current yearly income is $50,000; others earn $25,000; or your current yearly income is $100,000; others earn $200,000. Surprisingly, roughly half chose the first option, preferring “a world in which they had half the real purchasing power, as long as their relative income position was high.”
We see the same thing in the investing world all the time since people think it’s important to keep pace or outperform the market or others. Your portfolio manager is, therefore, “being compensated” for their outperformance against both passive and active managers.
However, with enough time, five-star managers become one star and few, if any, can consistently beat the market. This, by the way, doesn’t mean you should go entirely passive, because you could end up doing the same thing — chasing the best-performing markets, sectors or segments.
Instead, we think a portfolio manager’s role is to try to determine a goals-based return specific to a client and try to achieve it while minimizing risk as much as possible. This means protecting against market drawdowns, and participating in the rallies, albeit likely not to the same extent.
The variability of returns will still expand along with the higher goals-based return, but the point is the target isn’t about keeping up to the market or active managers.
Have preferences versus desires
Most of us have desires and our happiness is contingent on achieving a specific outcome, which if we don’t get, can leave us depressed or even anxious about what lies ahead. A neat little trick I’ve personally learned is to turn a desire into a preference, so you aren’t as impacted by the outcome as much. According to Wikipedia, “desires are directed at one object while preferences concern a comparison between two alternatives, of which one is preferred to the other.”
By having preferences, you greatly increase the probability of achieving your goal in a broader sense, because the goal includes a range of outcomes that you would be satisfied with, again, independent of everyone else. This way, one becomes what Nassim Nicholas Taleb describes as anti-fragile, or “becoming more robust when exposed to stressors, uncertainty, or risk.”
Play the long game by being an optimist
There is a lot to be said about the power of positive thinking. A 2010 study, The Importance of Being an Optimist: Evidence from Labor Markets, showed that optimistic MBA students experienced significantly better job search outcomes than pessimists with similar skills. They also spent less effort searching for jobs, were offered them more quickly and were more likely to be promoted than others.
Morgan Housel in his book the Psychology of Money highlights the tremendous “seduction of pessimism,” as it is natural that during times of trouble or distress that we feel things will get worse before they get better. The media also reinforce this since the more negative one is, the more authoritative one sounds.
But Morgan points out that “the historical odds of making money in the U.S. markets are 50/50 over one-day periods, 68 per cent in one-year periods, 88 per cent in 10-year periods, and (so far) 100 per cent in 20-year periods. Anything that keeps you in the game has a quantifiable advantage.”
Our inner world shapes our perception of the external world and our interaction with it. If you want positive change, start by no longer comparing yourself to others, don’t make your happiness conditional on some outcome, have a set of preferences versus desires, and have an optimistic view by playing the long game. I never said it was easy, but the best things in life rarely are.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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