Saturday, 27 July 2019

The Real Cost of Stock Investing

If you buy a stock, what do you have to pay? The most obvious answer is the stock price plus the brokerage and taxes. That’s true but that’s not the total cost. The total cost of investing in a stock or the stock market is its quantifiable element and the unquantifiable element. When most investors talk about costs, they are talking about just the quantifiable element, not the latter one.

What is this unquantifiable element? It is the peace of mind. By investing in the stock market, you unknowingly commit to parting with your peace of mind. Now there are many things apart from stocks that can deprive you of the peace of mind and we are not going to talk about those lest we would enter into a philosophical realm from which it is difficult to escape. But like those things, stocks also can also claim a fair share of the peace of your mind. Ironically, most investors invest in stocks for wealth creation that could give them peace of mind eventually, but that’s what they keep losing every day.    

How does this happen? No matter if you are an experienced investor or a rookie, movement in stock prices causes you to experience a range of emotions over a short period of time—from ecstasy to despondence to anxiety to fear to doubt to irritation and so on. These emotions and their rapid fluctuations and recurrence are as if you were on an emotional roller coaster for the full day. You can imagine the impact it has on you. Little surprise, people in the financial industry age faster (my own observation; I don’t have any study backing it).

Emotional instability is the biggest cost you pay for investing in stocks. And because this cost can’t be stated in a currency, investors keep paying it without knowing that they are. This cost is much more than the gains you will ever make. Over their investing lives, most investors will be in net loss. That’s sad. 

What to do? Should you stop investing in stocks? No, of course. In order to reduce the emotional cost of stock investing, cut yourself from the financial world as much as you can. Don’t check your portfolio too often; once a week or fortnight is just fine. Consume less of financial news and analysis; most of it is useless in the medium to long term. Follow your stock strategy, not market movements. Find other useful pursuits than worrying about stock prices, the economy and the market.

It’s only when you have cut the emotional cost of stock investing that you can proudly say that you have made money in the stock market.

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