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Bad Is Stronger Than Good - Investing Version


Kevin Michels, CFP®, EA

Pop Quiz:  Over the past 70 years, how often has the S&P 500 closed positive for the day?

A.  72%

B.  64%

C.  53%

D.  46%

Remember, when in doubt, always go with C!

Since 1950 the S&P 500 has closed the day with a positive price gain 53% of the time.  Logical thinking could lead to an assumption that an investment that’s only positive 53% of the time is more of a gamble than an investment.  However, since 1950, the S&P 500 has had a total price return of 18,000% (not including dividends).

More than anything that’s a testament to compound growth, but for purposes of this article, I’d like to focus on another aspect.

One of the most crucial parts of my job is reminding and helping clients to keep a long-term perspective.  In order to keep a long-term perspective, one piece of advice we often give clients is this:

Don’t check your account daily.

We give this advice for two reasons:

  • As mentioned above, almost half the time your account will be negative (depending on your asset allocation of course).
  • Also, as humans, we’re hard-wired to focus and remember negative experiences more than positive ones. So, most likely, it will seem like your portfolio closes negative more often than it closes positive.

Roy Baumeister, a professor of Social Psychology at Florida State University, co-authored a journal piece called “Bad is Stronger Than Good”[1].  In this piece they discuss the human tendency to focus on and remember negative experiences more than positive.

One experiment they quote in their article is when participants “either gained or lost the same amount of money.  The distress participants reported over losing some money was greater than the joy or happiness that accompanied gaining the same amount of money.  Put another way, you are more upset about losing $50 than you are happy about gaining $50.”

The second piece of advice I often give clients is this:

Investments in the stock market are intended to be long-term.

It’s absolutely true that in the short-term the stock market is volatile, fickle, and random.  Just earlier this month, the S&P 500 rose on negative economic data!  The June jobs report underwhelmed, but the stock market rose on the anticipation of interest rates being cut because the report indicates economic slowdown.  How does that make sense?!  It doesn’t.

But that’s okay because an investment in the stock market is a long-term investment.  One thing history has shown us is that you’d be hard pressed to find a better long-term investment than putting your money in a diversified stock/bond portfolio.[2]

Think of it this way:

While the S&P 500 closes positive only 53% of the time day-to-day, how often does it close positive in a 1, 5, or 10 year time period? 

  • Since 1970, the S&P 500 has ended the calendar year positive 80% of the time.
  • In all of the 5-year periods since 1970 it’s closed positive 84% of the time.
  • In all of the 10-year periods since 1970 it’s closed positive 95% of the time.[3]

And take into account the fact that you’re not just invested in the S&P 500, but in a diversified portfolio.  While this may lower your expected long-term return, it definitely helps the volatility of your portfolio.  Just add in 10% of bonds[4] and over any 10-year period since 1970 your portfolio would have been up 100% of the time.

It’s absolutely true that in the short-term the movements of the stock market are random and sometimes irrational.  But investors that keep a long-term perspective won’t sweat the day-to-day or year-to-year swings.

Develop a plan, revisit the plan often, and stick to it through good times and bad, that’s the key to successful investing.

[1]https://assets.csom.umn.edu/assets/71516.pdf

[2] Past performance is not a guarantee of future results.

[3] Data based on total returns for the S&P 500 TR Index.  Rolling returns were based on calendar year total returns.

[4] Data based on total returns for Bloomberg Barclays Aggregate Bond Index.