Live coverage of the London Olympics on the BBC is attracting up to 20 million UK viewers each day and another 30 million have been catching Jess Ennis and Chris Hoy online. If you've been paying close attention to the winners' facial expressions, body language and comments, it's possible you've noticed an odd phenomenon: The bronze-medal winners may seem happier with their achievements than those who grabbed the silver.
At least that was the conclusion of a 1995 academic paper by Victoria Husted Medvec, Scott Madey and Thomas Gilovich. The study's authors examined the facial expressions of Olympic medal winners on the podium during the 1992 competition in Barcelona. Even after controlling for other factors, their hypothesis held up: Bronze medal winners seemed more content with their prizes than those who took home the silver.
The researchers chalked up these findings to a phenomenon that social scientists call framing—the tendency to respond to events based on our own experiences and cultures. The silver medal winners framed their performance relative to the gold medal winners, and berated themselves for not being able to emerge victorious even though doing so was close at hand. The bronze-medal winners, meanwhile, didn't judge their success alongside the gold and silver winners, but relative to the many athletes who will leave the games without winning any medals at all.
The concept of framing has been an important one in the realm of money and finance, too. In one famous study conducted in the US by Amos Tversky and Daniel Kahneman, shoppers said they would drive 20 minutes to save $5 on a $15 calculator, but wouldn't drive the same distance to save $5 on a $125 calculator. The savings were the same in both instances, the frames were not.
The Olympics study, meanwhile, has particularly rich implications for how investors view their own performance. By framing our success or failure relative to the wrong yardstick, we risk not only making ourselves miserable, but undermining our financial well-being at the same time. Here are some ways to ensure that you're using the right frame of reference when evaluating how you're doing.
MYOB
The obvious takeaway from the Olympics study is one we probably all got from our parents at an early age: mind your own business. Just as mentally healthy athletes know that the real gauge of success is how well they've delivered on their own expectations for themselves, the true measure of your investing performance is whether you're getting closer to your goals as the years go by, not whether you're beating Warren Buffett or your boastful brother-in-law. Yet it's easy to see how so many investors fall into the silver-medal trap: They start buying stocks and funds without stopping to think what will constitute personal success or attempting to quantify what they'll actually need for financial goals such as retirement.
Online tools such as Morningstar's Asset Allocator (sign in to your Premium account or take a free trial for access) can provide a rough gauge of whether your current investments and asset allocation, combined with your planned future contributions, put you on track to reach your goals on an inflation-adjusted basis. Revisiting your progress towards your goal should be the lynchpin of any portfolio check-up and can help you stay focused on what factors you actually control.
Be Honest About Your Abilities
Even though your progress towards your financial goals should be the main measure of how well you're doing, that doesn't mean you shouldn't keep track of how good your investment choices have been. Are you adding value relative to an inexpensive, plain-vanilla benchmark or subtracting it?
To find out, I advise creating a custom benchmark that matches your own portfolio's asset allocation, saving it in our Portfolio Manager tool (register for free to access), and using it to gauge your investment-selection acumen on an ongoing basis. I discussed the specifics of setting up such a benchmark in this article. If your stocks and funds underperform a benchmark consisting of simple, inexpensive index funds over time, it's wise to ask yourself whether you might not be better off investing in such a cheap, low-maintenance index fund or exchange-traded fund portfolio instead.
Don't Get Hung Up on 'The Best'
Finally, too many investors, like the dour-looking Silver medal-winning Olympians, have an unhealthy preoccupation with "the best"--they want to buy the best stocks at the lowest possible prices, and they want their funds to be at the top of the heap at any given point in time. That's a misplaced effort and one that will almost certainly lead to misery and too much trading. Rather than obsessing over obtaining the lowest possible price for a stock or engaging in the impossible task of finding a fund that will always be on top, your best bet is to stack the deck in your favour by keeping your asset allocation sensible and practicing smart portfolio-management techniques like pound-cost averaging and rebalancing. Those strategies all but guarantee your performance won't be "the best," but they also greatly improve the odds that it will be far better than average, as discussed in this article.
