Losing money is no joke. Witness all those forlorn investors who regularly appear on A Current Affair, 7:30 and 4 Corners, recounting how they were trying to secure their future before some financial disaster befell them. Whatever the cause (and we’ve discussed plenty of them) inevitably the discussion will turn away from their financial pitfall and towards their physical and mental well-being in the aftermath.
Never do any of these investors report their physical and mental well-being becoming better through the stress of financial loss. They don’t become happier. They don’t become stronger. They’re weakened by the experience and fearful for the future because of diminished circumstances.
A study by the University of California San Diego finance professors, Joseph Engelberg and Christopher Parsons delves a little deeper into this link between finances and health. Titled ‘Worrying About The Stock Market: Evidence From Hospital Admissions’, the authors moved away from the usual behavioral finance area of how investors might move the market and decided to focus on how stock market movements influence investor psychology.
The pair used patient records from all hospitals in California from 1983 to 2011 and tracked them against share market movements throughout the time period. One of the most striking things to note was that more than 5% spike in hospital admissions on the day of the 1987 stock market crash.
Across the three decades things were a little less pronounced and smoothed out, but the authors found generally when stock prices fell 1.5%, admissions to California hospitals increased by 0.18% – 0.28%. However, there didn’t seem to be any correlation between better health and extreme market increases as there was no corresponding decrease in hospital admissions when the market raged upwards. Somewhat confirming the loss aversion theory, where an investor feels a loss more acutely (usually double) than the pleasure of a gain.
Significantly, the hospitalization rate was most linked with mental health conditions such as anxiety.
The authors admit that they don’t know if any of those people admitted to the hospital actually owned stocks, but there was no other correlation with admissions that was so consistent as the downward movement of stock prices.
Co-author, Parsons says the genesis of the study partly came from noticing his own father’s behavior, “the first thing my dad does every morning after he’s made his coffee, follows the market for three hours. If it’s doing well, he’ll be in a good mood. If it’s not, he gets very nervous. He’ll call me to ask what I think he should do.”
His father rarely responds by then making investment decisions, but it affects his mood and what he’ll choose to do for the rest of the day. Which seems quite unhealthy itself.
The best way to minimize this and remove emotions from clouding decision-making is to understand what we can and can’t control. In the process hopefully eliminating stress and a potential hospital admission.
Asset Allocation, Diversification, Fees, the Risk assumed, Behavior? Yes.
(control your fees/costs)
Market movements? No.
(investment journey to wealth creation)
#investing #retirement #retirement planning #smsf #wealth creation #martincossettini #bluediamondfinancial