First time investor

[rutgers07]

This investing thing is not easy! I've done a ton of reading but it definitely doesn't help when you see your Roth account already losing money! I know to not touch it but it's still an emotional impact that I thought I prepared myself for before I started investing. My biggest problem is that I'm checking the account every day to see how it's doing which I know isn't good. I've got to learn how to "set it and forget it." I suppose this is all part of the journey though.

[feh]

This investing thing is not easy! I've done a ton of reading but it definitely doesn't help when you see your Roth account already losing money! I know to not touch it but it's still an emotional impact that I thought I prepared myself for before I started investing. My biggest problem is that I'm checking the account every day to see how it's doing which I know isn't good. I've got to learn how to "set it and forget it." I suppose this is all part of the journey though.

Are you investing for retirement? Is that day a long ways off?

If so, ignore the daily/monthly fluctuations. Don't even look, if it bothers you.

[jIM_Ohio]

There are 5 phases of investing which carry different emotions, and you need certain habits to overcome the emotions.

1) Starting out. This phase lasts as long as your contributions are 20-100% of the value of the account. For example if you invest $200/month and account value is $1000, the contribution is 20% of the account size, you are still "starting out".
2) Accumulation. This means the annual gains of the account are less than the monthly contribution. For example, if you invest $200/month and account is worth $8000, a 2.5% return is $200, you are still accumulating. When account generates a 10% return ($800), you are moving on to next phase. Most people spend a significant amount of time in this phase.
3) Growth. This is when the annual gains of the investment are much greater than the annual gains. For example, if a person invests $200/mo ($2400/year) and the $240,000 portfolio generates $2400 year, the person is in Growth mode. The portfolio will grow whether person contributes more money or not.
4) Income. This is a tipping point, when a portion of the growth is used to live on. This will be retirement for most people, but might also be a loss of a job or some reason income is needed. If a person has a $480,000 portfolio which generates $48,000 of gains, and they only take out $30,000 of the gains, they are in this phase. The portfolio netted $18k of gains (48k-30k) so it still increases in absolute dollars.
5) Draw down. This is point of no return. This means the annual gains of the portfolio are not enough to live on, and assets must be sold to generate income. If a $480,000 portfolio generated $48k in income, and a person needs $60k, the 12k deficit means they draw down portfolio to cover the difference. Once a person sells assets, they are likely to need to go back to work, or draw down for the rest of their life.

The emotions in each phase are different, and how to control them are different.

When you are starting out, focus on learning about the investments you selected, not the performance. Develop habits of researching decisions, like which mutual fund was selected, and if it lost money, learn why. Don't focus on how much you lost (which is what you are doing), focus on why investment lost money (what does mutual fund own).

When accumulating, most people want to see more growth. Find out what investments grew over last 2-5 years, and decide if you should own those too. When starting out, most people will have 1-2 investments, when accumulating, people will usually add more investments. Focus on this decision making process, not the performance.

In growth, people care more about their performance than where they add new money, and focus here should be on taxes, account titles (Roth, 401k, taxable, trusts) and learning of alternative investments (Real Estate, convertibles, other) and understand how adding the investments will impact performance.

In Income, focus is on whether portfolio generates income needed. If this focus is used in any of the first 3 phases, the wrong lessons are learned, so the focus should be on income only when income is a need of the portfolio.

In draw down, the worries of seeing the money last are of biggest concern to people, this is not an emotion usually considered in first two phases.

[tulog]

Yes, in Nassim Taleb's book 'Fooled by Randomness' he discusses the effect of frequently checking balances of volatile assets. He mentions that the emotional impact of a loss is much stronger than the corresponding emotional benefit from a gain. Thus, over the course of time, people who check a volatile asset frequently will experience a net negative emotional impact. The result is higher blood pressure (a known effect of chronic stress), as well as other lesser known effects (such as brain damage and resulting dementia). Also, for an average investment, checking less frequently means that a higher percentage of the results will be positive since the long term trend is positive - but any random point you check could be a loss.

A rationalization of the 'reasons' for the loss or gain is rarely accurate. Financial newspapers always find a reason why something went up or down. But the truth is that much of these short-term movements in price are mere random noise, not relevant information.

Thus, if you want to see more positive results, see information instead of noise, and do not want to have chronic stress causing you a risk of dementia, check your balances less frequently.

[jIM_Ohio]

Yes, in Nassim Taleb's book 'Fooled by Randomness' he discusses the effect of frequently checking balances of volatile assets. He mentions that the emotional impact of a loss is much stronger than the corresponding emotional benefit from a gain. Thus, over the course of time, people who check a volatile asset frequently will experience a net negative emotional impact. The result is higher blood pressure (a known effect of chronic stress), as well as other lesser known effects (such as brain damage and resulting dementia). Also, for an average investment, checking less frequently means that a higher percentage of the results will be positive since the long term trend is positive - but any random point you check could be a loss.

A rationalization of the 'reasons' for the loss or gain is rarely accurate. Financial newspapers always find a reason why something went up or down. But the truth is that much of these short-term movements in price are mere random noise, not relevant information.

Thus, if you want to see more positive results, see information instead of noise, and do not want to have chronic stress causing you a risk of dementia, check your balances less frequently.

I would echo this and summarize by suggesting focus time on knowledge over performance.

Analyze the financial decisions you have recently made by reading about them at different places and if the analysis suggest the decision was good, focus on acquiring more knowledge.

[SeanH]

Thanks for that post tulog. Has me considering my behavior.

[rutgers07]

jIM and tulog, thanks for your great replies. It was helpful reading both of them and looks like this is a good time to truly start to learn about investing and what it encompasses. I don't plan on stopping my automatic contributions and understand this is just random variation. But it will be good to learn how to regulate my emotions and not worry about these blips. I think someone asked earlier and I'm almost 29 so I have 35 years until retirement (although it would be nice to retire early..wishful thinking maybe).

Although I've been working since 17, investing it brand new. I knew nothing about it growing up and didn't really know it was a thing until I started educating myself. I still have plenty of time but it's a shame I didn't start earlier.

[Petunia 100]

There are 5 phases of investing which carry different emotions, and you need certain habits to overcome the emotions.

1) Starting out. This phase lasts as long as your contributions are 20-100% of the value of the account. For example if you invest $200/month and account value is $1000, the contribution is 20% of the account size, you are still "starting out".
2) Accumulation. This means the annual gains of the account are less than the monthly contribution. For example, if you invest $200/month and account is worth $8000, a 2.5% return is $200, you are still accumulating. When account generates a 10% return ($800), you are moving on to next phase. Most people spend a significant amount of time in this phase.
3) Growth. This is when the annual gains of the investment are much greater than the annual gains. For example, if a person invests $200/mo ($2400/year) and the $240,000 portfolio generates $2400 year, the person is in Growth mode. The portfolio will grow whether person contributes more money or not.
4) Income. This is a tipping point, when a portion of the growth is used to live on. This will be retirement for most people, but might also be a loss of a job or some reason income is needed. If a person has a $480,000 portfolio which generates $48,000 of gains, and they only take out $30,000 of the gains, they are in this phase. The portfolio netted $18k of gains (48k-30k) so it still increases in absolute dollars.
5) Draw down. This is point of no return. This means the annual gains of the portfolio are not enough to live on, and assets must be sold to generate income. If a $480,000 portfolio generated $48k in income, and a person needs $60k, the 12k deficit means they draw down portfolio to cover the difference. Once a person sells assets, they are likely to need to go back to work, or draw down for the rest of their life.

The emotions in each phase are different, and how to control them are different.

When you are starting out, focus on learning about the investments you selected, not the performance. Develop habits of researching decisions, like which mutual fund was selected, and if it lost money, learn why. Don't focus on how much you lost (which is what you are doing), focus on why investment lost money (what does mutual fund own).

When accumulating, most people want to see more growth. Find out what investments grew over last 2-5 years, and decide if you should own those too. When starting out, most people will have 1-2 investments, when accumulating, people will usually add more investments. Focus on this decision making process, not the performance.

In growth, people care more about their performance than where they add new money, and focus here should be on taxes, account titles (Roth, 401k, taxable, trusts) and learning of alternative investments (Real Estate, convertibles, other) and understand how adding the investments will impact performance.

In Income, focus is on whether portfolio generates income needed. If this focus is used in any of the first 3 phases, the wrong lessons are learned, so the focus should be on income only when income is a need of the portfolio.

In draw down, the worries of seeing the money last are of biggest concern to people, this is not an emotion usually considered in first two phases.

This is an awesome post, Jim_Ohio.

[moneysma]

A few thoughts after reading your post:

First, stop checking you balance every day. It doesn't do you any good. Check monthly or every few months. Or, do what I do and only look on days when the market jumps higher by 1% or more. It doesn't matter to me if my overall balance is down, I just see that today I made a few hundred bucks and it makes me feel good.

Next, do your best to remove emotion from the equation. This is why most fail at investing - they give in to emotion. They get scared and sell or get over confident and buy. Once your emotions enter the game, you are bound to lose. It isn't easy to keep your emotions in check but you have to if you want to be successful.

Third, ignore everything Wall Street says. The TV shows, magazines, internet sites are all trying to get you to react (aka use emotions). That is how they make money. The more you trade, the more fees you pay, the more money they make. If you buy and hold - which works regardless of what anyone says makes Wall Street no money and they don't want you to do that. They want you trading. Think about it: back in the day, people stayed invested for a long time and made out fine. Now we have 24/7 coverage, people trade all of the time and fail at investing.

Fourth, ignore the "experts" on TV and in magazines. They will say XYZ stock is buy. The question is, for who? For you or for me? They know absolutely nothing about your financial situation. What might be great for me is completely wrong for you. Create a plan for you and stick to it. You know your goals, time horizon and risk tolerance, so invest based on that and ignore all of the other advice.

[CandaceKroslak]

Re: First time investor

If you are investing for the first time then you have to keep certain things in mind. You must have knowledge about the nature of business and various facts related with it. For example if you are investing in gold you must have knowledge about various market trend since gold value keeps on fluctuating.

[MatthewC]

Hi rutgers07!

Yes, tracking your investments closely is very nerve-racking for many people.

Perhaps you could use some better reading for the stock market. The book I recommend (the only book I recommend) for the stock market is "What Works on Wall Street" (Fourth Edition) by James P. O'Shaughnessy. This book is filled with tons of statistics on the stock market, all of which cover more than 4 decades worth of data and some of which go back to before the Great Depression! If you can read this book and implement what is inside it, then you won't have to worry anymore because you will know that even if this year is a bad year, other years will make up for it.

The book sells for less than $30 on Amazon, but seriously, at $300 I would consider the information contained within it to be cheaply bought. Buy this and use the data in it, then never be nervous about how your account is doing again - because you will know that your long-term prospects will be solid.