An Epidemic You Haven't Heard Anything About
An epidemic you haven't heard anything about... Americans are more stressed than ever before... Why we're all 'idiots' when it comes to money... How to avoid this massive investment mistake...
Today's Digest is a little different...
We're taking a break from our usual fare to discuss a silent epidemic that's sweeping not just America... but nearly the entire world.
We're not talking about opioids... or obesity... or Zika, SARS, MERS, antibiotic-resistant bacteria, or any of the other things to fear you've likely seen or read about in the news.
As our colleague Dr. David "Doc" Eifrig recently explained to his readers, the real epidemic facing the modern world is one you rarely hear about. From the December issue of Retirement Millionaire...
We face an epidemic of stress. The American Psychological Association's Stress in America report, from 2016, showed we had a jump in overall stress levels... the first such movement in 10 years.
Think about that... During the 2008-2009 financial crisis, we didn't see this kind of jump in stress levels. The market bombed, banks went out of business, businesses shuttered up and down Main Street... but stress didn't increase. Compare that with today... The market is hitting all-time highs, the economy is growing, yet stress is still increasing.
Top stressors for Americans include money, work, and the economy. In fact, 62% said that money would be a significant source of stress in the next several years.
Let that last point sink in...
By most accounts, the markets and the economy are doing just fine. (Of course, regular readers know we believe things aren't what they seem beneath the surface.) Yet folks are more stressed than ever before.
What will happen when today's historic boom inevitably ends... and the next downturn begins?
Even under the rosiest scenarios, today's extreme valuations across most financial assets suggest returns are likely to be dismal for years. And regular readers know the worst-case scenario could be something far worse.
Either way, tougher times are coming. Which means stress – and the serious health consequences associated with it – is likely to become an even bigger crisis in the years ahead. More from Doc...
Stress lays the groundwork for a deadly chain reaction in our bodies...
Stress increases levels of inflammation, which in turn leads to things like diabetes and heart disease.
Stress also interferes with your sleep and weakens your immune system. That makes you more vulnerable to cold and flu season – something we know is associated with heart disease and death...
And it's stress that often drives us to eat and drink.
Worse, no one is immune to these problems...
As Doc noted, financial stress isn't reserved for those who are struggling to make ends meet. Even wealthy and successful investors are at serious risk.
By nature, finances and money questions are stressful topics. They're hard to avoid. Most investors were stressed out during the financial crisis in 2009, when the market was falling to multiyear lows. But a quick glance at the mailbag most days suggests many folks are still stressed out at today's record highs.
But you don't have to be a victim.
In fact, Doc says you can ease financial stress and "nudge your body into a deeper sense of contentment and relaxation" with just a few minutes of effort. And it all starts with understanding one simple fact: Money makes all of us "idiots."
Doc noted that back in August, with the Powerball jackpot reaching $700 million, a lottery frenzy ensued. Financial website Business Insider sent a reporter to a newsstand on the street to offer to buy people's freshly purchased tickets for up to two times their face value.
Yet the majority of folks turned down the offer. They held on to their tickets as if they had already won. As Doc explained, this makes no sense at all...
We all know that those tickets will likely be worthless after the lottery drawing. Even before the drawing, when those tickets have some value because they have some (infinitesimal) chance of paying off... if someone offered you double the price you should take it... If nothing else, you can go buy twice as many lottery tickets. (That would up your chances from one in 292 million to one in 146 million. How could you lose?)
But the point is this... folks make weird decisions. In the case of lottery tickets, something in our animal brains creates an attachment to that ticket. Once it's ours, we value it more. And what if we gave away the winning ticket?
Of course, while this is just one simple example, most of us suffer from similar errors of judgment – or "behavioral biases" – without even realizing it. It's just how our brains are wired to work. But they can lead to real and costly mistakes when investing your hard-earned savings.
Fortunately, there is a simple solution... You see, while a huge number of behavioral biases exist, Doc says three in particular account for most of our financial stress as investors.
In other words, you don't have to be perfect. If you can identify and resolve just these three "boneheaded" mistakes, you can dramatically reduce your financial stress.
We'll discuss the first – and arguably the most serious – here today...
This bias is known as "loss aversion."
Despite the name, this bias may be responsible for more losses any other investment mistake folks make. As Doc explained...
Think of a coach who says, "I like to win, but I hate to lose." This is known as "loss aversion" – the idea that losses have a larger psychological impact than gains of the same size. We hate to lose. And folks especially hate to lose money. Sometimes it drives us to leave money on the table...
We've all held a stock that's headed down. And we've all – at some point or another – kept holding, hoping to get even. "If it could just get back to my buy price, I would sell and move on." That whole time, you've got your capital tied up in a stock that the market has soured on. Meanwhile, other stocks are shooting up left and right.
Believe me, the dollars you earn by "getting even" are no more valuable than the dollars you'd earn by switching to the stock of a better business. You should cut your losses and move on... But many investors simply can't do that. Folks become emotional with stocks that turn into losers.
Don't feel bad if you've made this mistake...
It's not just you... These biases are built into our brains. Without awareness, even the smartest people can make them again and again. More from Doc...
In a seminal study by Terrance Odean of the University of California, Davis, an analysis of 10,000 individual brokerage accounts found that investors held losing stocks for a median of 124 days versus a median of 102 days for winning stocks.
Good investors have to stay rational in the face of a down stock... But we're humans first, investors second. We simply can't be trusted to keep our emotions in check.
So... how do you resolve this common mistake?
The answer should sound familiar to longtime readers: We take advantage of strategies that take emotions out of this decision-making process altogether. And this is where stop losses come in. As Doc explained...
A stop loss is simply a predetermined price that tells us it's time to sell. For example, you may decide to sell a position if it drops 25%. We typically use trailing stop losses that adjust higher as the stock price rises. That protects more of our gains.
The key is to set your stop when you open a position, and honor it when the stock declines to that price.
As soon as we hit our stop, we sell. No questions asked. We don't let our emotions influence us.
If you've been with us for long, we hope you're already using trailing stops...
But you may not realize loss aversion can trick you in a different and far less obvious way: It often causes folks to sell their winners too early.
Many people "have a feeling" the market has peaked. We routinely get feedback from our readers who tell us we're foolish to stay long stocks. But as Doc explains, this isn't necessarily based on analysis of a bigger economic trend. It's simply based on seeing the balance of their brokerage accounts climb higher, and readers being worried about losing money.
This kind of loss aversion is more difficult to avoid. It can feel rational to sell a big winner and lock in your gains. But standing on the sidelines and missing out on potential future gains can be just as real. Doc shared a recent example to illustrate this point...
Consider a company that has risen 230% in the last four years. It trades for 270 times earnings and only has a 1% operating margin. Oh, and it faces fierce competition from giants like Wal-Mart (WMT) and Netflix (NFLX).
Be honest with yourself...
If you owned this stock, how would you have felt? If you're like most folks, you probably would've been worried. You would have had an overwhelming urge to sell and take your profits. But as Doc showed, that would have been a mistake (emphasis added)...
Well, the company is online-retail behemoth Amazon (AMZN). And most importantly, those stats were from 2012. Since then, revenues have more than doubled, and shares returned an additional 324%. The stock, for now, seems like it can't be stopped.
When we recommended Amazon in May, we noted [that] Amazon can turn profitable – highly profitable – any time that it wants to. It can simply dial back the spending on some projects and the money will pile up...
That's just what it did this quarter. In October, analysts expected earnings of $0.04 per share... Amazon brought in $0.52. We're up about 18%.
The surprises, and the good news, keep coming for Amazon. But it would have been easy for investors to get scared and sell because it certainly felt like a peak in 2012.
Again, we all naturally tend to think that locking in gains is the 'smart move'...
But this is simply loss-aversion bias at work. In reality, Doc says your best bet is almost always sticking with high-quality businesses that are performing well...
Stocks are on a tear and reaching new highs every day. And a lot of stock charts today look like Amazon's.
Resist the urge to call a top. That fear of loss is crippling. Instead, look at the underlying fundamentals of a company and the economy. Let logic influence your decisions, not emotions.
In other words, unless your reasons for owning a stock have changed, stick to your plan. And again, using trailing stops is the best and simplest way we know to help you do that.
If you aren't already using stops on all of your positions, we urge you to fix that immediately. Commit today to let your stops – rather than your emotions – decide when to sell both your losers and your winners.
You'll not only dramatically reduce your stress... you'll also become a much better investor in the process.
You can get instant access to Doc's complete research on the three biggest financial stressors (and their solutions) with a subscription to his excellent Retirement Millionaire advisory.
We know of no better source of simple and practical advice to improve both your wealth and your health than Retirement Millionaire. And at just $199 for a full year, there is no better value in the industry. Click here to learn about a 100% risk-free trial.
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Regards,
Justin Brill
Baltimore, Maryland
December 13, 2017