Why frequently checking your portfolio is bad for your health and wealth

There are no shortcuts when it comes to investing. Good processes, not temporary outcomes, are the keys to positive long-term results. Focusing on short term noise is a proven wealth destroyer.

Daniel. P Egan, a behavioural finance specialist, works to lower the “behaviour gap” of investors. He found the more frequently investors monitor their portfolio, the more likely they are to observe a loss. While it may seem like good stewardship to frequently log into your account to check on your performance, in reality this is likely to:

Stress you out
Encourage you to tinker with your investment allocations
Hurt your investment performance

Research has shown that the more investors monitor their portfolio, the riskier they perceive investing to be—a phenomenon known as myopic loss aversion. Over-vigilance also gives investors more opportunities to react to short-term returns by changing their asset allocation.

It’s a statistical artefact of the stock market that the more frequently you monitor your portfolio, the more likely you are to see a loss since you last looked. Daniel’s conclusion was if you’re checking your portfolio more than once per quarter, you’re doing it too much.

An investor who checks his or her portfolio quarterly instead of daily reduces the chance of seeing a moderate loss (of -2% or more) from 25% to 12%. And that means he or she is less likely to feel emotional stress and/or change allocation.

Ensuring our clients behave themselves and are not stressed by short-term returns is a big part of our job at Stewart Partners.

Behavioural finance expert and 2002 Nobel winner Dan Kahneman adds:

“When directly compared or weighed against each other, losses look larger than gains. This asymmetry between the power of positive and negative expectations or experiences has an evolutionary history. Organisms that treat threats as more urgent than opportunities have a better chance to survive and reproduce”

Placing long term credence into short term fluctuations is a fool’s errand.

“It’s a great idea to base my financial future on the flip of a coin.” – said no one ever.

Investors occasionally forget the definition of risk, which can be summed up as the possibility that the actual returns on an investment will be less than the expected returns.

Risk and reward are two sides of the same coin; to have a chance to generate higher returns requires accepting greater risk. Better performance comes with the possibility of worse performance. We all have to be mindful of this each time we invest, and for the duration of our investment, which is normally the duration of our lifetime.

With investing, time is usually on your side. Even on a yearly basis, stocks on average are likely to rise. The graph below shows the distribution of 12 month returns for the US market net of inflation.