I went to an event last night about the markets and the economy put on by Thrivent Financial for Lutherans for its members. The group’s Head of Equities Dave Francis spoke as did spokesman Patrick Egan and Money Magazine Executive Editor Diane Harris.

Diane has written for the magazine for years and I thought I’d paraphrase the handful of insights about investing and our brains that she shared last night here. See if any of this sounds familiar.

1. We fear the wrong risks most. She asked if more people are killed every year by crocodiles, snakes, deer or bears (I think she had another scary animal on the list but I can’t remember it). The answer is that more people die in auto collisions with deer than they do in attacks involving the other animals combined. Her point? Investors worry about losing money in the stock market much more than they worry about their money being eroded by inflation. But history has shown that the market on average goes up about 8 percent per year. And there’s no doubt that if you put your money in a plain old savings account, its purchasing power will be whacked in half by inflation during your retirement.
2. Investors tend to suffer from home bias– investing too much in what we know i.e. domestic company stocks or company stock, and missing out on other opportunities. With the U.S. making up less than half the market capitalization of the world’s stock markets, Harris suggests we have at least 20 percent of our investments in international stocks. And never have more than 10 percent in company stock.
3. Investors are wired for the big kill. We want to make the huge returns, not the slow, steady, and more likely ones. She uses the example of the lottery; even she can’t resist standing in line for the $100 million jackpot even though she knows there’s a greater chance that she’ll be struck by lightening than anointed the next lottery multi-millionaire.
4. We anticipate that losses will be more painful than they really are. She cites a study that was done where individuals were given $5 and told to flip a coin. If they guessed which way the coin would fall correctly, they’d get an additional $5. If they lost, they’d have $3 taken away. Before starting the exercise, participants were asked to predict how they’d feel if they won and how to feel if they lost. They figured they’d stay happy if the won and sad if they lost for an equal amount of time. Turns out they were happy if they won, but the players who lost felt sad for a shorter period of time. The reason? They fixated on the $2 that they still had, not the $3 that were gone.
   This is how I feel about my portfolio. Yeah, I preferred the days when I was earning 12 percent versus the ones where I’m losing 12 percent. But I take comfort in the fact that my portfolio is growing by virtue of me regularly investing through dollar cost averaging, even when the market’s in the tank. And I know that eventually, things will turn around.

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