William Bernstein is unquestionably more intelligent than the average investor. He was a practicing neurologist before he turned his attention to investment management and authoring books about investing and global economic history.
Jonathan Clements, a long-time Wall Street Journal personal finance columnist calls Bernstein the smartest person he knows.
With the education and experience of a neurologist, Bernstein pays close attention to how our brain dictates the emotional mindset around money.
In his latest book The Investor’s Manifesto – Preparing for Prosperity, Armageddon, and Everything in Between, he writes briefly about how human nature causes people to weight negative events or experiences more heavily than positive experiences.
Where investments are concerned, behavioral finance research suggests that one day of investment losses offsets two days of gains in our psyche. Therefore, Bernstein writes, we should refrain from monitoring investment results too frequently in order to feel emotionally better about the journey toward the goal.
If you looked at the daily results of the Dow Jones Industrial Average from 1929 through 2008, you would see positive returns 51.6% of the time and declines 48.4% of trading days. If one negative day outweighs two positive, we would be significantly net negative emotionally when viewing performance daily.
If we review gains or losses monthly, the percentage of ups and downs don’t change significantly – 57.5% of all months between 1929 and 2008 experienced market gains, 42.5% losses.
Over a full year, there were 52 positive years and 28 losing years. This difference is not quite enough to offset a 2-to-1 impression of negativity.
Most people prefer to monitor investments more frequently than once per year but if they did, their decisions would likely be more positively aligned with their goals and the opportunity presented by the market.
Short-term reactions often have unintended long-term impact on investment success.
“It is the ability to ignore these dysfunctional instinctive responses that determines, as much as anything else, which investors wind up with the highest returns,” Bernstein writes.
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