We’ve all seen those stories of people getting rich quick in the stock market. They all look something like this: “Joe turned $1,500 into $1M in 3 years!” or “Sally made $3,000 overnight trading penny stocks! Here’s how she did it!”
When you read stories like these, how do they make you feel? Are you skeptical? Curious? Envious, even? Do you suddenly think less of the slow steady growth you’ve experienced in your own portfolio?
No matter how large your returns are, there’s always someone enjoying larger returns. And there’s usually someone (or many someones) flaunting their larger returns for all to see. In these moments, it’s easy to let envy take over—to be resentful of their investment prowess or luck.
This is investing’s “siren song.” For every person who wins big in the market, there are many others who make far less and some who lose—to varying degrees.
Studies show that active traders have some of the lowest returns in the market. Over the past 14 years, only 1% of active traders have made money in the stock market—80% have actually lost money.
My point is, beware too much of a good thing. You may feel envious toward people getting rich overnight, but here are 5 reasons why you shouldn’t care.
Reason 1: The Truth About Short-Term Returns
Current returns are always a result of trade-offs. Some people choose to take on more risk. Some choose less. Within the same risk levels, some people choose to emphasize one mix of asset classes, and others choose different mixes.
None of these investors can predict what will outperform or what will underperform. For those who choose asset allocations that do exceptionally well, sheer luck is to blame. They can’t predict what will happen. I can’t predict what will happen, and neither can you.
In something as unpredictable as investing, you can’t judge the long-term process by the short term outcomes. The more you do, the worse off you will become.
Reason 2: Returns Even Out In The End
Have you ever heard of the term mean reversion? It’s the idea that markets always push asset class performances back towards their long-term averages. This means that outperforming asset classes may become a drag on overall portfolio performance in the future and underperforming asset classes might provide a boost.
No one can tell when the transitions will occur. Sometimes things can look out of whack for years. Still… In the end, it all tends to even out. Every investment has its day. We just can’t predict or control when that day will come.
Reason 3: Envy Is An Emotional Response
Envy is an emotional response rooted in feelings of inferiority, hostility, and resentment. Your brain sees returns being enjoyed away from you by another investor, and it covets the returns and maybe resents the person who received them. If you stop for a moment (and remember “luck” from reason 1), you’ll realize this thinking is flawed.
Envy contradicts how diversified portfolios actually work. The goal of diversification ISN’T to outperform. You don’t need more return to reach your goals. You need returns that correspond with your planned trade-offs, investment strategy, and your risk management processes. Comparing your investments to others leads to a higher propensity to make changes more often, higher costs and taxes, lower performance, and ultimately—unhappiness. And, whenever envy pushes you to chase those returns, it often leads to losses as mean reversion goes into action (See reason 2).
Reason 4: You Made A Financial Plan, Stick To It
You don’t need more returns, you just need enough returns. Cut out the noise and stick to your financial plan. When you pursue more returns, you inevitably seek to add more of the stuff that has already done well and you inadvertently pursue more risk. This pursuit often ends in lower returns and with you not even reaching the financial goals you set for yourself in the first place.
If you want to be successful in the long-term you must stick to your financial plan in the short-term. Life always offers trade-offs. When you’re faced with the option of either piling on more risk or sticking to your well-thought-out financial plan, choose the latter.
Reason 5: Envy Blinds You Of Your Own Success
This study on relative returns shows how the success of your peers (and the market as a whole) determines how happy you are with your own returns. These two examples explain further:
Example 1: What happens when you compare your returns to the returns of the market:
The market as a whole is climbing up and your portfolio is too, but not as much. You’re dissatisfied. Even if your returns are higher than they’ve been in the past or higher than they need to be to reach your goals, they’re lower compared to some (probably inappropriate) benchmark at this very moment in time. Everyone’s claiming the higher returns of “the market,” so you’re unhappy with your own progress.
Example 2: What happens when you compare your returns to the returns of your peers:
There’s a hot new stock on the market and you’re not in on it. Even though your investment strategy is paying off (and you’re seeing the returns you need), you’re envious of your peers. They’re experiencing more success. You wish you would’ve done things differently. You wish you had more exposure to the one thing that is doing best.
In both of these examples, envy blinds you from seeing your own success. In either case, you’re left dissatisfied—even if things are working exactly as both you need and they’re supposed to.
The Bottom Line
Envy destroys your happiness and makes it harder to reach your financial goals. Don’t compare yourself to other investors. You have a well-thought-out investment strategy. You have a solid financial plan. Don’t let emotions uproot everything you’ve worked so hard for up until this point.
There is no secret sauce to beating the stock market. You can’t get rich quick by spotting opportunities. These are just 2 illusions sold to you by our competitive investment culture. If you want to unmask 6 other money illusions keeping you from happiness (and financial success), check out Mindful Money: Simple Practices for Reaching Your Financial Goals and Increasing Your Happiness Dividend.