All investors are flawed and all the behavioral literature pretty much establishes that. We do a lot of dumb things such as:
Chasing recent performance (recency bias)
Selling winners and holding on to losers (confirmation bias)
Relying only on first impressions (Anchoring bias)
Making decisions based on easily recallable information and examples (Availability bias)
In spite of the mountains of research, countless experiments, and Nobel prizes, investors continue to do dumb things that hurt their investing outcomes. Why? It’s a question worth pondering over.
I don’t claim to have an answer, I’m not nearly smart enough. But here’s what I think. There are hundreds and thousands of books, videos, papers proving that we do dumb things. Agreed, but knowing that we are biased and ensuring we don’t succumb to those biases are two vastly different things. We humans, are creatures of habits and we don’t change unless we really have a strong desire to or we have a life-threatening event that forces us to re-evaluate things. And no amount of behavioral coaching or seminars will help, for most parts, those are just money-making scams.
For example, not saving enough is a universal problem. Most people change this, only when they realize that they might not have a job or a house tomorrow if things were to change.
But let’s look at this from the lens of a really silly mistake almost all investors make, including me - checking our portfolios too frequently.
Now, this is a without a doubt, incredibly bad behavior. In fact, Betterment one of the oldest Robo advisors in the US analyzed this behavior. Here’s a stunning statistic:
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 the allocation.
There’s rich academic literature which documents this human stupidity 2 of our very primal instincts come into play here.
- We care more about losses than gains. This is called as loss-aversion - remember the time you held on to Yes Bank even as i kept falling into an abyss?
- Even though people invest for long term goals like retirement, they end up checking their portfolios daily. And when you are conservative i.e. have a low risk-taking appetite, or you end up reacting to short-term news and take decisions that end up ruining your long term goals.
“The investors who got the most frequent feedback (and thus the most information) took the least risk and earned the least money.” An excerpt from a landmark study by Richard Thaler, Amos Tversky, and Daniel Kahneman. All 3 are Nobel Prize winners.
This is nothing new. People have documented that checking your portfolio too frequently is harmful going as far back as 1905. Here’s an excerpt from a source:
The more you check your portfolio, the higher the chances you doing something really dumb. There’s absolutely no use of checking your portfolio daily or monthly when you are investing for long term goals. For example, if you are in your late 20s and if you are investing for retirement, a goal which is about 30+ years away, what’s the point of checking your portfolio daily. Assume you check your portfolio on a negative news day and you do something dumb, your retirement goal, you may end up with far less than what you might have needed. Hell, you might even go homeless because of this.
Why would you do something deliberately, that will end up, without a doubt causing irreparable damage to your long term financial goals?
Check your portfolio as infrequently as possible. In my view just, an annual review will suffice so that you can re-evaluate your funds and re-balance your portfolio to keep your asset allocation in line.