Remember when Charlie Brown found a rock in his trick-or-treat bag in the Peanuts Halloween show? That’s the way I think a lot of us feel when the stock market “corrects.”
Sure, we’ve been listening to Robert Shiller, Jeremy Grantham and other market experts tell us this was coming (as they’ve done before earlier corrections). But hearing about something that could be painful and actually experiencing that pain are such different things, of course.
(No, I have not been checking my portfolio performance hourly or even daily. Yes, I am having a review session with my advisor soon … I can’t wait, right?!)
Like other investors, current conditions give me a chance to tinker with my portfolio — including my holdings of ETFs, a product that’s the focus of two feature stories this month. With my advisor, hopefully, I can avoid making any bad decisions tied to “loss aversion.”
This concept, studied by Harvard professor Brigitte Madrian — a subject of a magazine feature last month — is critical to appreciate. “The literature suggests that people are twice as sensitive to losses as they are to gains,” she said in a recent radio interview.
If we hate losing twice as much as we love winning, it’s easy to make bad choices and do things like buy high and sell low. (I had trouble stopping my mother from doing this in 2008.)