Ignorance Can Increase Your Returns

This is probably the first article you’ve read that extolls the benefit of ignorance. I’m not discussing ignorance stemming from your failure to proactively learn about a new subject. The ignorance I’m advocating is willful ignorance of information readily accessible to you.

How can this ignorance benefit you? Read on.

A different perspective

Most investors save for retirement, using a combination of retirement accounts (like a 401[k]) plan and after-tax accounts. Hopefully, you won’t need to access funds in your retirement accounts until after you retire.

If you are a 40-year-old investor, you have a minimum of almost twenty years until retirement.

What we know about the market is that, between now and when you will retire, it will have stomach-churning ups and downs, depending on the percentage of your portfolio allocated to stocks (the greater your allocation to stocks, the higher your volatility).

Even if losses are “unrealized” (meaning they are paper losses only), it’s still anxiety producing to look at your statement and see a decline in the value of your portfolio.

That’s where you need to employ your new secret weapon: Ignorance.

The pain of losses

According to Nobel Laureate Daniel Kahneman, the pain of seeing losses is more than twice the pleasure we get from seeing gains.

Here’s a little-known fact: The S&P 500 index incurs losses in almost 50% of trading days. If you check your portfolio daily, that’s a lot of pain.

What if you could discipline yourself to only check your portfolio balance once a year? In theory, that seems difficult, but ask yourself this question: Why do you need to check it more frequently when you have so many years until you need access to the money in your account?

By extending the time when you look at your portfolio to once a year (at the end of the year), you will experience the pain of seeing a loss to only once in five years! A huge reduction.

The benefit of ignorance

Adopting this new plan has other benefits. It reduces stress and anxiety. It keeps you from succumbing to the pressure to “do something”, which may cause you to make decisions based on short-term events. These ill-advised decisions are often harmful to your long-term returns.

While ignorance is rarely a positive trait, monitoring your returns less frequently can be a useful strategy to help you reach your retirement goals and enhance your peace of mind.