Peter Lazaroff, CFA, CFP® Chief Investment Officer
Quit looking at your portfolio. You’ll be happier, and perhaps even wealthier over the long term.
The Digital Age has made access to stock market data and real-time account values increasingly easy, but it causes investors to lose sight of the big picture.
A daily check-in on your brokerage account or the stock market indexes shortens your mental time horizon to match the frequency of feedback, which isn't nearly as long as your planning timeframe. This is doubly dangerous because of the way viewing an unrealized loss impacts an investor’s mindset.
The Nearsighted Investor
Psychologists have identified loss aversion as a behavioral bias that makes losses hurt about twice as much as a similar sized gain makes us feel good – the result is that investors tend to make poor decisions as a consequence of trying to avoid the pain of a relative or absolute loss.
Myopic loss aversion is the idea that the more we evaluate our portfolios, the higher our chances of seeing a loss and, thus, the more susceptible we are to loss aversion. Additional research shows that investors who get the most frequent feedback also take a less than optimal amount of risk and earn less money. In other words, a nearsighted approach to investing has a measurable impact on wealth building.
On the other hand, investors that check their portfolios less frequently are blissfully unaware of the daily fluctuations -- they are more likely to find gains and less likely to make bad decisions stemming from loss aversion.
The More You Look, The More You Lose
Using historical returns on the S&P 500, you have a 46% chance that the market will be down on any given day. However, if you were to wait longer and look at monthly returns, that percentage drops to 38%. If you only look once a year at the past 12 months of returns, the chance you will see a loss drops to 21%.
The table below shows different rolling periods and the percentage of time you would have historically experienced a positive or negative return. Because the S&P 500 averages positive returns over the long-term, spacing out your stock portfolio surveillance increases the likelihood you’ll see gains.
Focus on the Long Term by Creating a Plan
Most investors have a multiple decade time horizon whether they are just beginning to save, in the middle of their careers, or currently in retirement. However, evaluating your portfolio in quarterly or even annual intervals is making an evaluation as if you have a short-term planning horizon.
I’m not suggesting that people should only look at their portfolios once every ten years – although I wouldn’t discourage it – but the worst behaved investors I encounter are those that are evaluating the stock market and/or their portfolios over short time periods. Plus, markets are far too random in the short-term to draw any meaningful conclusions about the success or failure of an investment plan.
A good plan clearly lays out what your goals are, how much they will cost, and when you hope to reach them. Then use the plan as a lens to periodically evaluate your investments, not based on daily performance, but to determine whether you are on- or off-track toward reaching your goals.
A solid plan serves like corrective glasses for the nearsighted investor, improving your life by lifting your gaze from the market (which you can’t control) to your specific target and timeframe.
So maybe you can keep checking your portfolio. Just make sure you have a good set of glasses on first.
A version of this post originally appeared at PeterLazaroff.com