Losing Feels Twice As Bad As Winning


With the ups and downs in the market over the past few months, it’s no wonder that investors are becoming increasingly uneasy about their portfolios. Investors with a formal financial plan expect ups and downs in the market, knowing that the long-term trend is for markets to increase in value. Yet, even knowing markets will go down is different from the feeling investors can get when they see the results of price declines on their statements.

The Psychology

Psychologist Daniel Kahneman (Nobel Prize, 2002) showed research that losing may hurt twice as much as gains make you feel good (Thinking Fast & Slow, 2011). This is true not only with words of praise and regaining trust, but can be especially relevant and quantifiable when dealing with money. The volatility of the stock market forces investors to override their innate tendencies to act on fear, and instead must allow self-discipline to restrain a response based on negative emotion. For those who are unable to control their emotions during down markets and sell out, the results can be devastating to their financial plan. 

The Reality

It doesn’t help that currently both stocks and bonds are down so there are few places of refuge for the anxious investor. Since 1974, we have seen bonds offer a buffer against falling stock prices because they are usually negatively correlated with each other. It is even more rare that, when they do move in the same direction, they both move down at the same time. This occurred only six times in the past 48 years: 1974, 1994, 2000, 2008, 2016, and 2018). But, so far in 2022 they are both down. 

Given the rise in interest rates, bond investors are reminded that bonds can lose value also. However, individual bonds do offer protection when you buy and hold them until maturity (immunization). Any price fluctuation in an individual bond may be ignored if you hold the bond until it matures, as you will receive the interest coupons and your money back upon maturity. You will lose money only if you sell prematurely – before maturity.

What the Future Holds

There is a possibility that inflation rates will continue to go up before they come back down. Everyone is feeling the effects of inflation, whether at the grocery store or at the pump. Keep in mind, however, that these increases being reported have already been around for many months and we all have managed to endure. The good news is that our financial plans have already been tested to see how they withstand historic bouts of inflation. Even though the long term inflation rate has been 2.9%, the fact is, 39% of the time since 1926, inflation levels have surpassed 3%. 

From 1966-1985, inflation averaged 6.19% per year; thankfully, stocks were able to outpace inflation over that 20-year period by earning 9.51% per year.

Preventative Measures 

  • Focus on your plan, trust it – these kinds of events have already been factored in. 
  • There are always new events but consider market history. A broadly diversified portfolio of stocks has the ability to outpace inflation rates over time.
  • While no one can control what the headline inflation rate may be, you can control parts of your personal inflation. Review your discretionary spending and trim anything unnecessary.

Consider I-Bonds for some cash holdings for the next 12-24 months (must hold 12 months, any withdrawal thereafter subject to 3 month interest penalty until after 5 years). The maximum anyone can buy is $10,000 in any calendar year (married couples, $20,000).

Kristi L. Tidwell, CFP®, CDFA® & Jason K. Branning, CFP®, RICP®

1 Dimensional Funds ReturnsWeb, CPI, 1/1/1926-12/31/2021.
2 Author’s calculations.
3 Author’s calculations.
4 Dimensional Funds ReturnsWeb, CRSP 1-10, 1/1/1926-12/31/2021.

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