Hands up anyone who would like more stress in his or her life.
Nobody? Didn't think so.
Fact is, with jobs, kids and BlackBerrys competing for our attention, we all feel overwhelmed from time to time. And that's before factoring in bonus stresses like garbage strikes and swine flu outbreaks.
So why would anyone want their investments to add to their stress levels? The good news is they don't have to. In the spirit of promoting harmony, balance and kick-ass portfolio returns, here are five ways to reduce investing stress.
Deep breath, everyone. Now let's begin.
1- STOP TRADING SO MUCH
Overtrading is one of the surest ways to crank up your stress level - and hurt your portfolio returns. If the transaction costs don't kill you, the temptation to buy at market peaks and sell at market bottoms will.
According to a study by University of California finance professors Brad Barber and Terrance Odean, active traders underperformed the market by nearly seven percentage points. "Our central message is that trading is hazardous to your wealth," they wrote.
It's far better - both for your emotional and financial well-being - to buy and hold high-quality stocks whose earnings and dividends rise over time.
2 - STOP CHECKING YOUR PORTFOLIO EVERY FIVE MINUTES
Watching your portfolio like a hawk may seem like the responsible thing to do, but it's a recipe for stress. Why? It has to do with basic math, and the way the human brain processes winning and losing.
In his book, Fooled by Randomness, Nassim Taleb provides a good illustration. Suppose your portfolio generates an average return of 15 per cent and has volatility of 10 per cent annually. Given these assumptions, your portfolio has a 93-per-cent chance of rising in any given year.
Problem is, the more frequently you check your returns, the lower the odds are that you'll be up. That's because, even though stocks rise over the long term, returns are highly unpredictable in the short term.
In any given quarter, for instance, there's a 77-per-cent chance of gains. In any month, the odds fall to 67 per cent. And if you check your stocks every hour, the probability of being up is just 51.3 per cent. In other words, you'll be disappointed roughly half the time.
Now consider this: Research has shown that people experience more emotional pain from a financial loss than joy from a financial gain. So if you check your stocks often, you're going to be stressed out a lot of the time. And in a bear market, you'll be downright miserable.
3 - FIND A BALANCE
This is one of the simplest - and most powerful - investing strategies. Ask yourself how much risk you can tolerate, and then build a portfolio accordingly. For aggressive (or younger) investors, it may be 70-per-cent stocks and 30-per-cent fixed income. For conservative (or older) investors, those numbers might be reversed. Once you find the mix that's right for you, stick with it. That means rebalancing every so often to keep your percentages in line, which is less stressful than trying to guess which way the market is heading.
4 - WRITE AN INVESTMENT POLICY STATEMENT
In his book, Optimal Investing, Scott Frush writes: "Much like a blueprint for building a house, an investment policy statement serves as the blueprint for building your optimal portfolio."
The idea is to put your investing goals, and how you intend to achieve them, in writing so you won't do something impulsive. When financial markets come unglued, you can pull your statement out of the drawer and read it, instead of acting emotionally and deviating from your plan.
Your statement can include such information as how much you intend to invest every month, what your target asset allocation is between stocks, bonds and other investments, and what your philosophy is regarding risk.
You can find a worksheet at http://im.morningstar.com/im/InvestPolicyWS.pdf.
5 - BUY INDEX ETFS
Most mutual funds trail the market, largely because of fees that eat into their returns. The easiest way to achieve diversification - without the hefty fees - is to buy an exchange-traded fund such as the iShares CDN LargeCap 60 Index Fund. With a management expense ratio of just 0.17 per cent, you'll eliminate the stress of paying a fund manager to generate mediocre returns. What's more, if you find it stressful to monitor a portfolio of individual stocks, owning a diversified ETF or two will solve that problem, too.
So do yourself a favour and ditch the stress. Your portfolio will thank you.
John Heinzl