Investment losses may be crucial for financial wellbeing! In this article, we lean on behavioural psychology to show how losses can arguably improve your financial wellbeing.

Moderating expectations

Investment losses are emotionally painful. So are gains, when actual returns are lower than expected. That means emotional pain relating to investments can be attributed to actual returns falling short of our expectations. Can we moderate this pain by moderating our expectations?

Philosophically speaking, we should be able to do so. But the argument may not be practical as relative wealth, not absolute wealth, is typically the reference point driving desire. Most individuals are not satisfied with current lifestyle, regardless of income levels. When individuals have more than enough to meet basic lifestyle needs, it often becomes a continual race to improve existing lifestyle. The comparison is both to past lifestyle and current identifiable peers. There, moderating investment expectation may not work unless experience tells us to do so.

That is where experiencing realised and unrealised losses help. Suppose investments were to always generate positive returns. When you get used to, say, an annual return of 12%, your investment performance may not be emotionally satisfying. Call it the dopamine effect. Your brain is excited only when the actual experience is better than anticipated experience. When you earn the same return every year, your brain is no longer excited about the experience. You need more returns to feel the dopamine high. But if portfolio suffers losses after a series of positive returns, expectations are naturally moderated. When returns are positive the next year, you may be emotionally satisfied because your reference point, or anchor, has changed. Positive returns this year, even if lower, will feel better compared with the negative returns you experienced last year.

Conclusion

We feel pain when actual investment experience falls short of expectations. But the pain recalibrates expectations. This can improve financial wellbeing. For one, we may be satisfied with lower gains on investments. After all, a positive outcome, even if smaller, may appear better compared with a negative outcome. For another, lower expectations could have positive effect (or less negative effect) on physical health. The upshot? Investment losses are inevitable, but there may be some positive effects from the experience.

(The author offers training programmes for individuals to manage their personal investments)

Published on March 9, 2026