30 Aug Investing with peace of mind
“I probably won’t make you a killing in the stock market, but the good news is, I won’t kill you either.”
This is a statement a financial adviser I know once told their client. While it may appear a bit strange seeing investing as a matter of life and death, but the real point of the statement is to stress the relationship between risk and reward.
New evidence from researchers at the University of California* have linked people’s health and stock market performance! Using individual patient records for every hospital in California from 1983-2011, researchers Joseph Engelberg and Chris Parsons found a strong link between daily stock returns and hospital admissions, particularly for mental health conditions such as anxiety, panic disorder, or major depression. They found that when the stock market fell significantly, hospital admissions for psychological health conditions spikes drastically over the next two days.
What this highlights are the dangers of trying to shoot the lights out when investing. It’s perfectly fine to seek to improve our investment return but not at the risk of jeopardizing our wellbeing. This is why, at Tandem, we go to great lengths to clarify the level of risk our clients are prepared to take when investment.
We use a psychometric test and a very comprehensive discussion to get a feel what their (your) risk appetite is. We’re all subject to emotional and psychological pulls on our finances and it’s crucial to better understand how we feel, how we think and what kind of personality we have before we invest. Arguable one of the greatest investment advice of all time is ‘investor, know thyself!’
* Engelberg, Joseph and Parsons, Christopher A., Worrying About the Stock Market: Evidence from Hospital Admissions (March 8, 2013). Available at SSRN: http://ssrn.com/abstract=2230615 or http://dx.doi.org/10.2139/ssrn.2230615