Over the years, you’ve likely to read a lot of articles or listened to a lot of pundits talk about how to be a better investor. They will tout everything from watching complicated charts looking for patterns, to more mainstream dollar-cost-averaging, to buying only the stocks of companies that you know, to a long list of other “tips” on how to make your million(s).
Surprisingly, the easiest route to improving your investment performance may also be the one that requires the least effort.
A recent article notes that all of us are wired to experience the pain of loss more than we feel the joy of gain—which is why we’re more upset about losing $20 than we are happy about finding $20. Translated into investment behavior, this means that we have an innate instinct to stop the pain of “losing” by selling an investment whenever it goes down, which is usually a bad idea when the markets are experiencing normal volatility. Research shows that trying to time the market is a loser’s game, even if it is driven by instinct rather than intent.
So, the solution is…? The less you monitor (or watch) your portfolio’s ups and downs, the fewer times you will experience the pain of (temporary) loss. The fewer times you will have an instinct to sell or change something, and the more likely you are to receive the benefits of the market’s long-term growth in value.
Consider the following charts showing periods when the market is down (in red) and when the market is rising (green). The first chart shows what that would look like if you checked every day—or if you watched financial news every day—to see how the markets performed. When you look at your portfolio every day, you will see red an average of 46% of the time, which means almost half the time you will feel an instinctive alarm and a desire to make a change. Oh, the temptation to make that pain go away!
The second chart shows the same ups in green and downs in red, but over periods of years instead of days. If you look at your portfolio only once a year, only 26% of the time will you see a downturn and feel that same self-destructive instinct.
This, obviously, is not a perfect solution. Even if you checked your portfolio performance just annually (and we’re not suggesting such a Rip Van Winkle approach!), you would still experience times when the markets are down, and you would fight the urge to make a change.
However, in the moment, instincts are harder to control than habits, so your future-self will thank you if you avoid the stimulus (checking your portfolio balances daily) that prompts your instincts to avoid pain (like selling your investments during a short downturn). If you can make a habit of looking at your investment returns less often (perhaps monthly, if you’re working with a professional advisor?), your instincts won’t have as great a chance to undermine your long-term results. Look less! Make more! Who knew growing your nest egg could be so easy!*
*Okay, there may be more to investing than that and we’re happy to discuss our evidence-based approach to investing with you any time. Give us a call!