Follow or not to follow?

When it comes to saving in stocks and mutual funds, there are many indications that the best insurance is to buy the stock and then stop following the price movements. This may seem a little strange, or maybe not @fredrikaa?

Why not treat the shares as the "lottery ticket" and sit in front of the screen when the shares fluctuate the most? Exciting times! I read in the subject "Behavioral Economics" at my master’s degree that Daniel Kahneman suggested that we were much more annoyed by the decline than we were looking forward to the rise in a stock. Based on his suggestions, it may be that we move away from stocks that we follow closely, precisely because we get annoyed in turbulent times, and we do not sleep well at night. Then we are better of emotionally when we stop to follow the stocks completely (?)

Imagine you are buying a stock that fluctuates a lot in one month, more specifically the stock is up $1000 one month and the second month it is down $900. If you only checked the value after two months, you will be able to enjoy a $100 profit. However, if you check every month, the $900 decrease last month may hurt more than the $1,000 rise in the first month. In fact, maybe so much that you choose to place the money somewhere else in the end.

A number of experiments have been done to test the above theory. Research has varied, for example, based on how often the participants receive information about the price, and it is typically found that the experiment participants choose more risk if they receive information about the price rarely. I once read an article about 100 stockbrokers who were to trade in a selection of stocks in an imaginary environment. Some of them received ongoing information about the prices - the others only received updated prices every 6th hour. The latter bought 33% more of the risky shares, while the group that received information more often bought more of safe bonds. Based on the above study, you should obviously buy shares, but do not follow them too closely. Does it make any sense at all to take risks and invest in stocks at all? It is clear that buying stocks offer more risk than other savings. At the same time, equities throughout history have yielded much higher returns than bank deposits. The difference has been so great that we could not explain it with an aversion to risk like the one we saw in other areas - and a possible explanation is simply that one followed too closely the declines and rises of the stock.

At the time of writing, it is true that more of us own stocks all over the world and the extra return on shares is expected to be much lower than before. The argument for buying stocks, as we understand it, is then weaker. Time to build your way into crypto? 😊

Worth mentioning in this article is also that it is clearly better to pay down credit card debt (if you have) than to buy stocks. If you have credit card debt, start repaying even if it stings. Repayment of loans gives an extra return in the form that the lower the loan is, as a share of the security, the better interest rate you can get. But it is still the case that you get a better expected return when the money is invested in shares than in a savings account. For many, it may make sense to have some of the savings in stocks. In that case, choose an index fund. Funds offer much less risk than a single stock. Index funds are also much cheaper than those that are actively managed. And the best thing can actually be to just leave the money without closely following the ups and downs. As Kahneman tells us in Behavioral Economics: We get more annoyed by the downturn than one is happy about the upturn. Or you can just go Hive and stay here, like, forever!

What do you suggest?

Cheers -Olebulls

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