Ask Doc 2024 was a good year for investors...
The markets didn't see any major corrections, and the S&P 500 Index climbed about 25% overall.
If you've been following our advice, you've kept your cash in stocks, enjoying their rise.
But lots of headlines are already anticipating a big correction this year. And if we get one, what will you do with your investments then?
Will you sell everything? Will you dig in and buy more stocks? Or worse, will you hang on to some real losers and refuse to let go?
Unfortunately, plenty of people choose that last option – obviously the worst of the three. It comes down to something called "loss aversion." It's the idea that losses have a larger psychological impact than gains of the same size.
Think of a coach who says, "I like to win, but I hate to lose."
It's a human response. We hate to lose... especially money.
But loss aversion doesn't just prevent us from cutting our losses. It can even prevent gains.
For example, macro research firm Dresdner Kleinwort Wasserstein surveyed 300 fund managers and presented them with a hypothetical...
You are offered the following bet. On the toss of a fair coin, if you lose you must pay £100, what is the minimum amount that you need to win in order to make this bet attractive to you?
In a perfectly rational world, even just £101 would make for a good bet if you could make it repeatedly.
But the fund managers wanted almost double that... an average of £190. They weren't willing to risk a loss unless the money was far in their favor. It turns out, people dislike losses about two times more than they enjoy gains.
This applies to investing as well...
We've all held a stock that's headed down. And we've all – at some point or another – kept holding it in the hopes of breaking even. We'll tell ourselves, "If it could just get back to my buy price, I'll sell it 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 and would be a better use of that money.
But many investors become emotional – unable to cut their losses and move on. The data proves it, too...
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.
This shows we're not only too slow to sell our losers, but too quick to sell our winners – for fear that we'll give back some of our gains.
And more recent studies have revealed a very interesting detail... While investors of course don't enjoy losing money, they're more OK with those losses if their neighbors lost even more.
Researchers out of Duke University found that folks are happiest when they lose less money than the guy next door. This is especially true for people with a lower income living in a wealthier neighborhood – struggling to afford the best cars, houses, and more. It weighs heavily on them, and they tend to follow the crowd more... particularly when it comes to investing.
It's "keeping up with the Joneses" in finance form.
This year, I don't want you following what your neighbors do. I want you to invest smartly – especially for timing when to buy and sell positions.
Our friends over at our corporate affiliate TradeSmith have now made this easier...
Earlier this week, I appeared alongside two Wall Street legends to discuss a new form of "magic calendar" investing. By using this breakthrough system and escaping the herd mentality, you could double your gains this year.
If you missed its unveiling on Wednesday, click here to watch the whole presentation for free.
Now, let's dig into the Q&A... As always, keep sending your comments, questions, and topic suggestions to [email protected]. My team and I read every e-mail.
Q: Doc... There's a commercial on TV about Prevagen where the "actor" says he saw a commercial and thought "that makes sense" so he started using the product. I've yet to see a Prevagen commercial that gives me any info at all where I could conclude that it makes "sense." I'm surprised this product is available without a prescription. Can you please give us your take on this product? Is it just another supplement that has bypassed FDA [U.S. Food and Drug Administration] approval? Thanks. – J.T.
A: Thanks for your question, J.T. Since you wrote us your e-mail last month, there has been major news on Prevagen...
For folks who aren't familiar, Prevagen is a dietary supplement meant to help boost your memory and cognitive function. Its active ingredient is apoaequorin – a type of protein from jellyfish that some believe helps improve mild age-related memory issues.
The reasons those commercials you've seen aren't very specific is because they can't be. There's no strong support showing apoaequorin does anything to help slow cognitive decline. In fact, some research shows that the protein breaks down too much during digestion to do much good for your brain.
Back in 2017, the Federal Trade Commission and New York state attorney general accused Prevagen of false advertising and unsubstantiated claims. And last month, they won the lawsuit. That means the company making Prevagen – Quincy Bioscience – can no longer claim that the supplement aids memory loss.
This case shows our main issue with the supplement industry... There's little regulation and often no hard science to back up claims that supplements help in any way. And, as we've written before regarding melatonin, the lack of regulation means you can't be sure of the dose you're getting. That can lead to dangerous consequences.
We're not against all supplements. But before you ever start taking a supplement, do your research. Follow the money behind any studies backing up claims that a supplement has some miraculous health benefit. You'll often find the studies are paid for by the makers of the supplement and not peer reviewed.
Always check drug interactions, too... Plenty of supplements can either hinder or amplify the effectiveness of any medications you're taking.
And think carefully about whether you even need that supplement in the first place. In many cases, a small change to your diet or lifestyle will get you the same benefit naturally.
What We're Reading...
- Did you miss it? Here's what you should expect for the markets this year.
- Something different: The color of your egg yolk matters.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
January 10, 2025