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Are you investing simply to feel good?

Updated: Nov 1, 2021

Recently, I heard a friend say, “I’m thinking about buying dividend-paying stocks of blue-chip companies and hold them for ten years”. The guy is in his late-40s and hasn’t ever made goals or invested in anything other than a couple of dud real estate properties.

I snapped, “That’s great! But how would you choose these blue-chip companies? How would you know if the company that you’re buying stock in, is over-valued or not? Do you have an investment plan? What if there’s a correction, recession, or a long bear market tomorrow, would you be able to hold onto your investments and not sell in a panic?” Turned out that he was tipped of by a friend who invests in blue-chip companies.

I call this placebo investing. Investing to simply feel good!

What is placebo effect?

The placebo effect is a phenomenon in which some people experience a benefit after the administration of an inactive "look-alike" substance or treatment. This substance, or placebo, has no known medical effect. The placebo is designed to seem exactly like the real treatment, yet the substance has no actual effect on the condition it purports to treat.

Unsurprisingly, a placebo is found to be more effective if the person knows that they are being given the substance, than without the person’s knowledge. For instance, a person in pain when given a sugar pill as a placebo starts feeling better even though there wasn’t any medication or painkiller given. It is believed to work in one of two ways. Either the placebo initiates the release of natural painkillers called endorphins, or they change the individual’s perception of the pain.

Are you investing just to feel good?

Similarly, placebo investing is simply taking solace in the fact that we are putting our money to work. Sub-par returns is also making your money work right!? Placebo investing is investing without a plan, without due diligence, without giving two hoots to performance or risk or diversification. It is simply to make you feel good that you are investing.

This is exactly the story of my banker friend.

“Do you invest?”

“Of course, I do.”

“Invest in what?”

“In blue-chip companies”

Sadly, without checking fundamentals, current price, sector/industry risk etc., he’ll put most of the money in one country, and a handful of sectors. He might feel good (just like swallowing a sugar pill during pain), until the day the market drops 30% and he rushes out of the meeting to sell the stocks at a loss.

“Investing in the first few years of my career was like a Placebo. It was simply to make me feel good (apart from avoiding some tax), without paying much attention to the goal, performance, or fees.”

Risks with placebo investing

The risk with placebo investing isn’t just about bearing too much risk, which might come from a non-diversified portfolio. But also bearing too little risk, which could be as bad as bearing too much risk. Remember the adage “the biggest risk is not taking any risk”. For instance, you might have been placebo investing in CDs for years returning 7% a year, only to realize that your real return after inflation is negative! Or have been investing in an expensive mutual fund that charges a 3% fee and doesn’t even beat the benchmark index. You come out of the placebo investing-mode only after the realization that you were swallowing a sugar pill for years without knowing it.

Day trading without expertise, performance chasing, real estate investing without doing the math, hot stock tips are all examples of placebo investing. You are simply investing to make yourself feel good, to avoid FOMO. Unfortunately, this ‘feel good’ feeling lasts only as long as you hear a friend talk about a better investment product or you read an article (such as this one) making you analyze your investment portfolio or when your investment drops in value considerably.

In medicine, the placebo effect has proven benefits because the patient believes in the placebo, whether it’s a substance or a treatment. It makes them feel better without addressing the underlying disease. This effect in investing is ditto. The placebo effect gets amplified with one’s belief in the investment instrument or the belief in the finance expert advising them.

Imagine you’ve just hit 40 and don’t have any retirement plan or investment goal. You approach a finance professional, who plans for you and sells you an investment product, which sounds too complex for your non-finance brain. You buy into it and feel happy that you’ve finally put your financial life on track. But only to realize a decade later that you were taken for a ride, by selling you something ridiculously expensive which attracts severe penalties to come out of the plan.

Taking a sugar pill unknowingly might make us feel better, psychologically as well as physically, and produce results. However, investing in anything that’s not rational will not bear fruits even though it might make us feel better in the short term.

Are you placebo investing?

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