Psychology tells us that we feel losses in our investments twice as strongly as we feel gains. It is called loss aversion. So why invest at all? Some people just enjoy the sport of investing, but most families invest in order to meet their long-term goals. That’s easier said than done when your investments are losing money. Sometimes when we get caught up in our concerns about short-term market losses, it becomes hard to stay focused on our long-term goals. Thank you Mr. Brain and loss aversion! Add the 24/7 news cycle on top of that and it gets even trickier.
Since losing money feels twice as bad, why not skip taking the risk of losing money in our investments altogether? The problem is that you have to take risk to get returns that are better than a savings account interest rate.
Most families need higher returns over the long run, so severe risk aversion may not be the best option. If you’re taking risk, then you’re either going to see your accounts go up or go down. Quite frankly, it’s also possible to pay an insurance company to take on the risk for you, usually for a handsome fee.
The reward of interest in your savings account is small because your risk is small. It takes risk to have the opportunity to increase your returns and that means you will probably watch your accounts go up and down in the short run.