The Progress Principle and Investing: How to Be Happy When You are Losing Money

There is a popular theory that one of the primary ingredients of happiness is progress. This is sometimes called The Progress Principle. In summing up the progress principle Psychologist Jonathan Haidt wrote:

“Pleasure comes more from making progress towards goals than from achieving them.”

Tony Robbins adds:

“I can tell you the secret to happiness in one word: progress.”

Dilbert creator Scott Adams describes the progress principle like this:

“Keep in mind that happiness is a directional phenomenon. We feel happy when things are moving in the right direction. The homeless guy who finds a promising dumpster is happier at the moment than the billionaire who just lost $100 million on a bad investment. It’s the direction of your life – progress if you will – that influences happiness.”

While happiness is undoubtedly more complicated than that my life experience leads me to believe there is a lot of truth in the progress principle. When I feel like I am progressing towards my goals and things are trending in the right direction I feel energized and optimistic – in a word, happy. But when I feel like I am not making progress I feel frustrated, uneasy, and depressed.

The progress principle puts those of us for whom financial goals are important in a perilous predicament. This is because whether or not we make progress towards our long-term financial goals is heavily determined by the seemingly random movements of the stock market over which we have absolutely no control.

This was brought home to me last weekend when I updated my investment accounts in Quicken. Understanding the progress principle I had been avoiding doing this for the last couple of weeks because I knew there would be significant losses due to the 5-6% market slide. I have found this strategy to be useful in the past. Sometimes if I wait only a couple of weeks after a downturn the markets will recover and I never have to actually see the temporary losses.

However, I do like to keep my accounts current, and since I got paid Friday, and thus made automatic investments into our retirement accounts, I wanted to record the purchases. Doing this updated our investments with the current share prices, so I had to face the music.

While I was expecting losses, they were somewhat greater than what I had prepared myself for. For the past several years the markets have been marching fairly steadily upward, and a graph of my investment returns shows very few months where we haven’t made significant progress. This month is different, showing a steep decline – a move away from our goals.

Due to the progress principle this put me in a temporary funk. I saw our goals getting further away instead of closer and it definitely didn’t make me happy. I was surprised by how much this affected me because intellectually I know this is not important.

I know downturns are expected; I know the losses are likely temporary; I even know that if I am smart the losses today will likely lead to quicker progress in the future. However, I am also human, which means my emotions often ignore the facts.

Understanding how dangerous it was to put my happiness at the mercy of the fickle movements of the financial markets I set out to find a different way to think about the situation. Knowing I am not the only one feeling uneasy about recent market losses I wanted to share my thoughts.  So here are four strategies to keep you happy even when your investments are losing money and you are not progressing towards your long-term financial goals. 

Look at the Big Picture

I have an incredible wife, four wonderful children who are doing great things, a grandson who has brought us more joy than we could have imagined, a good job, great friends, and the opportunity to serve in the church and the community in ways that I find meaningful. Looking at the big picture I have very little to complain about. All of us probably have many goals, in many different areas of our lives. At any time we are likely making progress in some of them and not making progress in others. While money is important, there are other things that are far more important. Putting money goals in perspective and focusing on other areas of your life where you are making progress can work wonders.    

Focus on Short-Term Financial Goal

You should only have money meant to finance long-term financial goals exposed to the stock market. This means that while you might not be making progress towards long-term financial goals in a market downturn you can still be making progress towards shorter-term goals. Paying off debt, building an emergency fund, and saving for a vacation should not be affected by the stock market. Focusing on progress in these areas can be a powerful counterweight to not making progress on long-term financial goals.  

Focus on Shares Instead of Dollars

For some time now I have enjoyed thinking of investing in retirement accounts as purchasing shares of my future. Each time I invest I look at how many shares of our future my wife and I are buying. Looking at it this way makes it clear that we really are making progress when we keep investing into the headwinds of a falling market. For example, because stocks were on sale last week I was able to buy a couple more shares of our future this pay period than I did last pay period with the same amount of money.  

As he so often does legendary investor, master teacher, and famous hamburger lover Warren Buffett put it best:

“A short quiz: If you plan to eat hamburgers throughout your life and you are not a cattle producer, should you wish for higher or lower beef prices?…But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective buyers should much prefer sinking prices.”

Buffett is arguing that, as long as you keep purchasing, you are increasing your progress towards your long-term financial goals when stock prices fall. Is this true, or is it just a Jedi-mind-trick to make us feel better when we are losing money? I have come to believe it is true.

The worth of our investment accounts is a product of the number of shares we have multiplied by the average value of the shares as follows:

Number of Shares x Average Share Price = Money for Retirement

When we pull money out of the account the price per share is an important part of the equation, but until that point the number of shares we own is far more vital. And the best news is that we can control the number of shares we own, but can do nothing about the price per share. While it takes some practice I think focusing on the number of shares you own, rather than the dollar value of your accounts, is a great way to overcome the potentially negative effects of the progress principle during a market downturn.

Make a Courageous Move

At a minimum you should stick to your plan and keep investing when the market drops. You might want to do even more than that to take advantage of the sale on stocks, but it will take some courage.

In 2015 I wrote an article titled 5 Simple Ways to Make Money Being Greedy When Others Are Fearful. The ideas included:

• Don’t Just Do Something, Stand There
• Rebalance
• Overbalance
• Tilt to Value
• Bet Big During a Crisis

These are all great ideas and today I would like to add a 6th courageous move you can make when everyone else is being fearful. This one is from Peter Lynch, who headed the Fidelity Magellan Fund during its incredible run from 1977 to 1990. The numbers end in 1992, so they could stand updating, but the principle is sound.

Lynch reports that if you invested $1,000 dollars in the S&P 500 in January of 1940 (impossible to do since Bogle didn’t introduce the first index fund until the late 1970s, but you get the idea), and added $1,000 to it in January of each year thereafter, by 1992 your investment would be worth $3,554,227. Pretty impressive.

Lynch than states

“…if you had the courage to add another $1,000 every time the market dropped 10 percent or more (this…happened 31 times in 52 years), your $83,000 investment would now be worth $6,295,000. Thus there are substantial rewards for adopting a regular routine of investing and following it no matter what, and additional rewards for buying more shares when most investors are scared into selling.”

Stocks haven’t dropped 10% yet during this sell-off but they might before it’s over. If it happens, consider making the courageous move of putting some extra cash into the market. If you can’t spare $1,000, try $500, or even $100. Then repeat this during each subsequent 10% drop. Making a courageous move to improve your future when everyone else is being fearful is a great way to make tangible progress towards your long-term financial goals even though you are currently losing money.  

In conclusion, the progress principle puts the happiness of anyone who is working towards long-term financial goals in jeopardy by exposing those goals to the fickle movements of a stock market over which we have no control. However, by looking at the big picture, focusing on short-term financial goals, emphasizing the number of shares you own more than their value, and making a courageous move when prices are favorable you can take control back from the unpredictable markets and be happy even though you are losing money.