I conclude my 5-part series on evaluating investment returns by looking at stress-adjusted investment returns. Most people I speak to experience some level of stress when it comes to investing. Have you found the ways of looking at investment returns stressful: risk, values, fees and taxes? This analysis has just scratched the surface. If you are more of a do-it-yourself investor or tend to accept your employer’s default investment for your retirement money or the recommendations of an advisor, you may experience stress along the journey. Popular stressors include fear of missing out or fear of loss. This article explores what stress-adjusted investment returns are, why they matter, and how you can use them to make investment decisions that align both your financial goals and your peace of mind.
What Are Stress-Adjusted Investment Returns?
Stress-adjusted investment returns are a way of evaluating the real-life impact of an investment by factoring in your time involved as well as the psychological and emotional strain associated with it. While traditional measures like risk-adjusted returns focus on the volatility and potential losses of an investment, stress-adjusted returns consider how much anxiety, worry, and emotional turmoil an investment might cause an investor.
For example, a high-risk, high-reward investment might promise substantial expected returns, but if the price swings lead to sleepless nights and constant worry, those returns might not be worth it to you. On the other hand, a more stable investment might provide lower returns, but with much less stress, making it a better stress adjustment for those who value peace of mind. That said, the stable return combined with your savings may be insufficient for you to build the account balance you need to retire comfortably.
Why Stress-Adjusted Returns Matter
As we have examined in the prior articles, investing isn’t just about gross returns. Financial stress can have significant impacts on your overall well-being, affecting everything from your health to your relationships. By considering stress-adjusted returns, you can make investment decisions that align not only with your financial goals but also with your personal comfort level.
Here’s Why Stress-Adjusted Returns Are Important:
1. Compromised Personal Well-Being: High levels of stress can lead to negative health outcomes, such as anxiety, insomnia, and even chronic health conditions. Investing in a way that minimizes stress helps protect your overall well-being.
2. Myopic Decision-Making: Stress can lead to poor investment decisions, such as panic selling during market downturns or hesitating to invest during periods of market growth.
3. Endangered Long-Term Financial Success: Investments that cause significant stress might lead to impulsive decisions that can hurt your long-term returns. By focusing on stress-adjusted returns, you can maintain a steady course, which is often more beneficial for long-term financial success.
Dealing With Investment Stress By Sticking With You Have
I have met many people who just don’t want to think about their investments. This is one of the reasons that the default investment for retirement plans was created. That was also where the target date fund was born. In that case, a selection is made for you. That is akin to the legal system providing an attorney for you if you don’t select one for yourself. It doesn’t suggest that attorney is great, it just means that you have one. Many people simply stick with what they have rather than going through the perceived stress of evaluating one. They believe that the benefits of that process couldn’t yield significantly better results than the one they currently have.
The Stress Of Aligning Your Values
Some investors find themselves troubled by certain social issues, such as the prison industrial complex, gender empowerment, climate change or wars and genocide. The effort to avoid investments that conflict with one’s values can be stressful, requiring significant research and monitoring. However, identifying a financial advisor who shares your values and has access to socially responsible investment strategies can relieve much of that burden.
How to Evaluate Stress-Adjusted Returns
1. Align Investments with Your Goals: Ensure that your investments are aligned with your long-term financial goals. If your portfolio is tailored to your objectives, you’ll likely feel more confident in your investment strategy, reducing stress.
2. Know Your Risk Tolerance: Your risk tolerance is a key factor in determining how much stress an investment might cause. If you’re uncomfortable with volatility, you might prefer more stable investments, even if they offer lower returns. Targeting lower returns may mean that you will have to save more money or push out the timeline on achieving your goals.
3. Reflect on Past Experiences: Think about how you’ve reacted to market fluctuations in the past. Did you feel stressed during market downturns? Were you anxious about your investments? Reflecting on your past experiences can help you understand which types of investments are likely to be more stressful for you.
4. Consider Professional Guidance: Working with an investment professional (see investment qualification types here) and with designations such as the Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) can help reduce some of the stress associated with managing your investments. An investment professional can provide guidance, reassurance, and a structured plan, which can help you feel more secure in your financial decisions. You may check out my article, Tools To Weed Out Predatory Financial Advisors.
Final thoughts
Incorporating stress-adjusted investment returns offers a more holistic view of investing by considering not just financial outcomes, but also the emotional and psychological costs associated with achieving those outcomes. By evaluating investments through the lens of stress-adjusted returns, you can make decisions that align both with your financial goals and your personal well-being.
In the end, investing should help you achieve financial security and peace of mind. By understanding and applying the concept of stress-adjusted returns, you can build a portfolio that supports both your financial future and your overall quality of life. Remember, the best investment strategy is one that you can stick with comfortably, allowing you to sleep well at night while your money works for you.
(This is the last article of an ongoing investment adjusted returns series – you can read Risk adjusted, Values adjusted , Fee adjusted, Tax adjusted)