Warning: Checking Your Portfolio Often is a Good Way to Lose Money
8 billion. That’s the number of times per day Americans collectively check their phones. Probably because smart phones have become the hub of our lives in a certain way – virtually anything you need, there’s an app for that. Including your investment performance. But frequently checking your portfolio is a good way to lose money – and it’s getting harder not to look.
Stop Checking Your Portfolio
We pride ourselves on making technology available to you that puts your entire financial life in front of you, in real-time. That makes checking your investment performance as simple as pressing a few buttons. And we intend to keep advancing that technology, to make managing your financial life as easy and convenient as possible.
With that in mind, call me crazy for what I’m about to say – You should stop looking at your investments.
There are plenty of reasons for why you should stop constantly checking your portfolio. At the top of the list is your mental and financial health. While you may think checking your portfolio often is a good habit, in reality this leads to increased stress, impulsive, emotionally-charged behavior, and poor investment performance.
The market is a volatile animal – it’s a toss-up every day whether it will be up or down. And here’s a secret – the market is in a drawdown often.
It can even fluctuate hundreds of points one way, and back the opposite way before the closing bell rings. The average daily swing for over 40 years has been +\- 1.4%. So, the more often you check your portfolio, the greater your chances of seeing it when the market is down.
And when you see negative numbers staring at you, your emotions will stop you in your tracks every time. Thanks to a little thing called myopic loss aversion.
What Behavioral Finance Tells Us
Myopic loss aversion was first introduced by Daniel Kahneman and Amos Tversky in 1984. This sliver of behavioral finance states that people dislike losing money more than they like making it. In other words, we feel the pain of a loss much more deeply than the happiness of earning.
Investors who check their portfolios often will perceive investing to be riskier than investors who don’t. According to Betterment’s data on login frequency, checking your portfolio quarterly instead of daily can reduce the chance of you seeing a moderate loss (of -2% or more) from 25% to 12%.
In a 1997 study by Kahnerman and Tversky, the idea that loss aversion reduces investor returns was confirmed once again by their research. Take this statement straight from their abstract:
“The investors who got the most frequent feedback (and thus the most information) took the least risk and earned the least money.”
In other words, the more time you spend checking and analyzing your portfolio, the more likely you are to let your emotions take control.
The Beer Goggles of Investing
Think of loss aversion as the beer goggles of investing – you’ll be more likely to see a loss the more often you check your portfolio. This can then make you think your investments are riskier than they really are. If you listen to your emotions, you can end up making some bad decisions – changing your risk tolerance, selling or liquidating funds, and so on.
And very rarely do these decisions end up helping you. Research proves that investor behavior is the leading cause of under-performance, and contributes to poor performance over the long-term.
DALBAR’s annual study of investor behavior shows that in 2015:
1. The average equity mutual fund investor underperformed the S&P 500 by a margin of 3.66%. While the broader market made incremental gains of 1.38%, the average equity investor suffered a more-than-incremental loss of -2.28%.
2. The average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by a margin of 3.66%. The broader bond market realized a slight return of 0.55% while the average fixed income fund investor lost -3.11%.
3. In 9 out of 12 months, investors guessed right about the market direction the following month. However, the average mutual fund investor was still not able to keep pace with the market, based on the actual volume and timing of fund flows.
You also need to remember that your portfolio is made up of several different asset classes, according to your risk tolerance. Even when the market is “up,” one or more of the asset classes in your portfolio may be down. If you happen to be checking your portfolio at this time, these losses will bother you more than the fact that the market is up will excite you.
Decisions incited by loss aversion don’t align with your most important goals that are outlined in your Investment Policy Statement. And remember, if a decision doesn’t meet these criteria, then you shouldn’t act on it. Period.
Why Does it Matter to You?
It’s your right to be able to check your portfolio essentially on-demand. Part of your job as an investor is making sure that you’re satisfied with your results.
Our job is to help you overcome bad investor behavior, and make smarter financial decisions. To reach your full financial potential, you need to implement strategies that account for the human side of investing, and in turn, help make for a smoother ride. That’s why we created strategies designed to mitigate the impact volatility can have on your bottom line – something that traditional strategies often ignore.
Investing is uncomfortable – it’s one of the most unnatural things you will probably do in your life. You’re putting your wealth on the line, when putting your wealth on the line is something you wouldn’t inherently do. But you have to get comfortable with being uncomfortable. You have to realize that investing is a game won by checking and stressing less. Rather than struggling to fight the market and potentially causing your financial health to suffer from harmful side-effects, take a break from checking your portfolio until your advisor says it’s time for a review.