Over the festive season I was doing an annual review of my investments. Although I tried to mentally prepare for it, I was still shocked at how badly my portfolio had done. It was a tough year to be any investor, especially a passive investor. I just didn’t see the growth I was hoping for (and mildly expecting). Instead, I was facing the idea of a South Africa in recession, an uncertain Europe with a pompous cousin that can’t work out if it wants to be part of the family and an uncertain global trade environment where our favourite non-Kardashian fake tan continues to baffle. It’s rough out there.
The tough market reminded me of a paper by Shai Davidai and Tom Gilovich. In their paper “The headwinds/tailwinds asymmetry”, the two described how we feel our headwinds (barriers) a lot more saliently than our tailwinds (benefits). Runners, hikers and walkers can relate to this feeling. When you are heading up a hill you feel it every single step of the way, your body acutely reminds you (generally through your heart trying to burst out of your chest) that you are heading up that hill. As you turn and start to head down the hill, your heart rate slows and for a second you feel relief, but very quickly that relief leaves and the downward slope becomes your normal. Treating benefits or gains as the new normal is a well-documented phenomenon in psychology. It’s called the “hedonic treadmill”. Conversely, when we are hindered we feel it acutely and for a while.
The headwind/tailwind asymmetry is exacerbated when it is done in comparison to others. Davidai and Gilovich did multiple tests that had different groups do comparisons to one another. The team studied the effect in democrats and republicans, NFL sports fans, siblings, and colleagues. In every study, each identified group felt that they had a tougher time than others. The study shows that no matter who you are, people tend to think that they have it harder than others.
Being a passive investor feels a lot like the phenomenon Davidai and Gilovich describe – it feels like we are constantly running uphill. We regularly have to listen to someone that sold Bitcoin at $19k while drinking their home harvested honey tea, sitting under their newly installed blueberry tree, listening to their timeshare cow mooing in the backyard. As passive investors, we are never going to hit those lottery tickets, because we don’t beat the market, we emulate it. We will always feel exactly rank average.
We think have it harder than the one person that hit the lottery ticket and made returns way above the market. But we forget all the benefits we get from investing in low cost passive index trackers. We are never the other 99 people that threw their money at Bitcoin, bees, blueberries, or cows and lost their money. We forget the folks that sent their money to high-powered, highly paid active investment managers and had to pay their first 3% in fees before watching their return underperform the market. We forget that very few investors beat the market over the long term, and in fact the easiest proven way to create wealth is to go with the cheapest, rank average, index tracker.
When you are looking at your portfolio and reviewing its performance over the last year, don’t forget to count the blessings you have received just by being in a low cost tracker. Don’t forget other people have thrown their investments at poorer returns and don’t mention it. Most importantly, when you hear that particular human boasting about their particular exotic investment’s trillion percent return, just sit back and wonder why they haven’t retired to a fancy private island somewhere.
This post is a guest contribution by Sean Combrinck. Sean is a blasphemy-bleeping, box-building, bubbles-imbibing, aspiring social psychology doctoral candidate that works in sales strategy.