A Watched Investment Pot Never Boils

The first thing to keep in mind is that in the overall scheme, inevitable short-term fluctuations in the market mean nothing. At the very least, they can make us uncomfortable or downright queasy as well as waste our time. At worst, high-frequency monitoring can lure investors into counterproductive actions that can end up costing them serious money. It is more effective to keep calm, carry on and work with professionals. Don’t follow the Dow Jones daily and wonder whether your long-term plans are going off the rails.

You are your own worst enemy

Why suffer unnecessarily? It is demoralizing to watch on the screen as your net worth plunges by thousands of dollars overnight. Ugly volatility does your mental health no favors.

The gravest risk is yielding to kneejerk behavior and impulsive decisions. Suppose a stock or position is up or down over, say, 20% — many investors may be led to sell. If it is up, they urgently want to lock in gains, which may be premature. If it is down, irrational fears whisper it will never recover.

It is entirely normal to be guilty of checking your portfolio too often. In fact, a survey by Select and Dynata found 49% of investors steal a look at their positions at least once a day. The perils of surveillance are quantifiable. If you can resist daily oversight and reduce your check-ins to quarterly intervals, you can narrow the likelihood of a moderate loss from 25% to 12%. In another study, SigFig used its own tracking software to discover that those who checked every day earned, on average, 0.2% less annually, while others who monitored twice a day performed even worse, gaining 0.4% less. Why? Blame excessive turnover.

The sad truth, as one Fidelity study revealed, is that the best portfolio performance goes to those who either forget their accounts exist — or die.

The pain of losses

These findings may seem counterintuitive. Why should conscientious oversight prove so destructive? In 1984, behavioral economists Daniel Kahneman and Amos Tversky unearthed part of the answer.

People hate losing money. They loathe the misery of losing even more than they enjoy the pleasure of scoring wins. The official term for this general human attitude is myopic loss aversion, which describes in plain English that you are more sensitive to losses than to gains. Experiments also show that people remember their losses more harshly and for longer than they relish the satisfaction of their financial triumphs. These hypotheses have been tested and proven time and again.

How would you feel about losing money? Would you be willing to gamble on a risk that would yield you $110 but cost you $100 if it went wrong? Many people are surprised to learn that you should take the bet if you follow the rationale of the theorists. The problem is that, on any given day, there is a 50% likelihood your stocks may be up and a 50% chance they may be down. Investors feel quietly pleased on the up days but wretched on the downs. That is when they risk taking ill-judged actions.

How often to check

As a rule, touch base every one to three months to ensure there are no dramatic changes in your portfolio. Do look at your positions at least once a year, though.

Novice investors, excited by the prospects, may take their portfolio pulse every day. In fact, they should have only mutual funds or exchange-traded funds in any case. Once you own individual stocks, you might check more carefully in quarterly earnings reports or even Securities and Exchange Commission filings.

Portfolio size and contributions matter. In smaller portfolios, regular deposits will help offset down swings, but as holdings grow, they will have less impact than gains or losses from the portfolio itself. Large portfolios may fluctuate more than an annual salary!

Most stocks tend to trade in line with the overall market. Watch out for divergences, and ask your financial adviser about key dates for your own positions. Meanwhile, find ways to manage your retirement income that are more productive than staring at your financial statements.