Building Wealth During the October market correction, what did you do? Did you sell everything? Did you dig in and buy more stocks?
Chances are that you followed all the fear-mongering news stories and sold at least some of your stocks. Or worse, you hung onto some real losers and refused to let go.
This is a typical pattern for something called "loss aversion." Loss aversion is 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.
In a study by the DrKW Macro research firm...
Three hundred fund managers were asked this question... "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 (about $129) 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, hoping to break 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.
But many investors just can't cut their losses and move on.
Folks become emotional with stocks that turn into losers. It's not just you...
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.
We're too quick to sell winners for fear that we'll give back some of our gains.
However, in more recent studies, we learned that it's not just loss aversion driving us.
It turns out, we can lose money... as long as we don't lose more than our neighbors. That's why some folks jump out of the market at the slightest correction – they don't want to risk losing everything, especially if they've already seen their portfolios wiped out in a prior crash.
Researchers out of Duke University found that most of it comes from communities. People with a lower income living in a wealthier neighborhood – struggling to afford the best cars, houses, and more – weighs heavily on people. These folks tend to follow the crowd more... especially when it comes to investing. And they're happiest when they lose less than the guy next door.
It's "keeping up with the Joneses" in finance form.
So what if I told you that right now, you're losing money? In fact, you're missing out on triple-digit gains?
I'm talking about using a strategy my team and I have been working on. We're finally ready to unveil the new service Advanced Options.
My team and I have spent 12 months testing and tweaking this system using actual recommendations from Stansberry Research.
We even have cases studies you can review in depth. And we show you that following our options strategy on each of these picks leads to gains like...
- $80 turning into $241 (on Ingersoll Rand)
- $185 turning into $500 (on Disney)
- $400 turning into $870 (on the iShares MSCI Emerging Markets ETF)
The way Advanced Options works is simple. We take Stansberry Research's best investment recommendations and "boost" them using advanced strategies in the options markets. Typically, these Advanced Options strategies reduce risk and increase profit potential.
In the study from Duke, researchers also found that folks who fear missing out on the best stock tips tend to go "risk blind." They're so eager to get ahead and earn more than their neighbors that they'll put too much of their portfolios in danger.
This is the perfect way to give into your eagerness without losing your shirt. Our Advanced Options strategy aims to increase your earnings while still managing risk. It's a win-win.
If you're not following this strategy, you're leaving money on the table... Money that could help you lead a full, rich life where you won't have to worry about outperforming your neighbors... They'll all want to keep up with you instead.
We're launching a special event for Advanced Options tomorrow, December 5. You won't want to miss out on this new strategy to boost your gains and reduce risk. Click here to find out more.
What We're Reading...
- Did you miss it? Our essay on learning the "Greeks" of investing.
- Something different: The most expensive baby gender reveal?
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
December 4, 2018