Quote of the day

Loading Quotes...


Watching the balances every night

I’ve made reference to the site MoneyChimp to show how over longer time periods, volatility decreases. Let me offer the observation that human nature what it is, a loss is felt twice as strongly as the same magnitude of gain. i.e. we feel twice as bad at a 5 point loss on the S&P as we feel good about a 5 point gain.
Now, let’s take the lesson from MoneyChimp and look instead at shorter time spans. Random Walk suggests that at any given moment it’s 50/50 whether a given stock will tick up or down. That would stand to reason. For any given day, the number is a bit better, about 52%. But given that we’d feel twice as bad on the down days as the up days, and the magnitude of the daily change is about the same, on average we’d feel twice the pain on 48% of the days as we’d good on the 52%. This adds up to being pretty miserable in the long run despite a rising market, averaging over 10% per year in the long run. What is the answer? Stop looking at the daily noise that will only bring misery. Add to your saving with systematic investing, and reallocate according to your long term needs. If you are properly allocated, you don’t need to look at your balance every night or even every month.
JOE

Leave a Comment