QOTD: The Financial Pain Equation

Acknowledge, allow and accept. This advice will help you to endure the inevitable pain caused by the next bear market. Experts in the centuries-old practice of meditation have a formula for suffering.

S = P x R. The amount of suffering you experience is equal to the actual Pain (P) times the mind’s Resistance (R) to the pain. So, S = P x R. The idea is to stop resisting the pain to lessen it. Since anything that is multiplied by zero equals zero, you see where this is going.

The quicker you realize market corrections and bear markets are not “bugs” in the financial system, the happier you will be. Acceptance of these facts is critical to creating your own form of Advil for financial pain, without the ulcer inducing side effects.

- Anthony Isola (Ritholtz Wealth Management)

So much bulls*** has been sold to investors in the guise of being able to avoid all the pain of investing but keep all of the upside. It’s a lie every time. You can lessen volatility in many ways, and in some cases you should – just make sure you understand the tradeoff you’re accepting. Because risk and reward are linked, inexorably. The greater the lengths you go to in the avoidance of potential suffering, the more susceptible you will be to disappointment, liars, con men and the low (or negative) returns that go along with all of that.

It will always be tempting to believe you can have your cake and eat it too, but almost no one is able to experience that over the course of an investing lifetime.

Our response to this reality (and it is reality) is to build portfolios and strategies that are sensitive to people’s threshold for pain and to use coaching and behavioral finance to help them get through it. It’s not the easy way, but if what we did were easy everyone would do it.

Hit the jump above for the rest of Tony’s post.

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