Investing can be a stressful activity that humans are ill-equipped to handle. As Robert Sapolsky showed in his book Why Zebras Don't Get Ulcers, while humans are well-adapted for dealing with short-term physical threats, short-term emotional threats like a market downturn can throw us for a loop if we try to react in the same way.
Faced with a physical threat, for example, the body boosts the heart rate to make sure we're ready to move. Unfortunately, that same instinct (do something now!) makes for lousy returns. When investors panic, we tend to sell. And when we sell when a stock is at its low, we're selling at the worst possible time.
Even the pros get stressed
But it's only natural to get worried about the stock market. Heck, even professional money managers suffer from stock stress -- a condition magnified by their requirement to report performance on a quarterly basis.
Since investors make decisions based on their portfolio performance every 90 days, managers have an incentive to protect gains or limit losses by selling first and asking questions later. If a manager starts falling behind his or her benchmark, investors will start pulling their cash. That's why money managers won't hold a disaster like NeurocrineBiosciences
In fact, you'll see many mutual funds with annual turnover of more than 100%, which means that the fund manager is turning over his entire portfolio once a year or more. Yet all that activity absolutely does not result in outperformance. A Morningstar study showed that funds with less than 20% annual turnover beat funds with more than 100% annual turnover by 1.6 percentage points per year over the past 10 years.
The trick to beating the market, then, is to remain cool, calm, and collected. Maybe even knock back a martini in the shade as the market plunges.
Follow this Fool
Motley Fool Hidden Gems analyst Bill Mann seems to be just that kind of cool martini-drinking customer. He stuck with reinsurer Montpelier Re
Going against the herd can be extremely difficult, but it can also be extremely lucrative; Bill has made this point before.
Suffering through volatility
The guy chomping Rolaids while churning his portfolio in search of short-term gains won't beat the market over the long term. The folks who do -- Warren Buffett, Charlie Munger, and Bill Miller, among others -- do so because they barely blink when the stock market drops. In fact, they buy.
Warren Buffett, for one, took a huge amount of flak when he invested hundreds of millions into USG
Even incredible outperformers such as Dell
The Foolish bottom line
Investment stress will hurt your returns. Try to take the long view, even as the market moves up and down in the short term. If you'd like some stress-relieving help from Bill Mann and Fool co-founder Tom Gardner, you're in luck. We're offering free 30-day guest passes to their Hidden Gems small-cap investment service, which is beating the market at large by 18 percentage points on average. Click here to grab yours.
Fool contributor Stephen Ellis can be one cool customer ordering take-out from Pizza Hut, so check out his holdings here . He owns shares in Dell. Dell, Pfizer, and Microsoft are Inside Value picks. Dell is also a Stock Advisor pick. The Motley Fool has a heartburn-freedisclosure policy.