“Money is like soap, the more you handle it, the less you will have.”
– Gene Fama
The typical owner of an individual bond couldn’t care less about the current price of that bond. When asked “why not?” they’ll say it’s because they plan on holding it to maturity.
This is a technically wrong but a behaviorally useful way of looking at things.
Because what this bond investor cares about is getting their principal back at the end and earning a little interest along the way—no thought is given to the bonds changing price between the purchase date and maturity—they’ve essentially taken the bond and placed it in a drawer until it matures. They’re in it for the long run—something that is easy to do with individual bonds as they are more expensive to trade with less transparent prices that are quoted less frequently. These are all negatives but with one behavioral benefit: a lower temptation for action.
Long-term investors would do well to pull a page from the typical bond investor’s playbook and put their entire portfolio in a drawer.*
In “Five Simple Behavioural Tips For Better Long-Term Investment Decision Making” Joe Wiggins, CFA offers a simple suggestion to “check your portfolio less frequently.”
“Whilst the benefits of transparency and access are significant they create a range of behavioural problems for the long-term investor. Quite simply – the more frequently we check our portfolios, the more myopic and risk averse we are likely to become in our decision making.”
“Although difficult, once we have a sensible investment plan in place, we should try to restrict our observations to a meaningful and realistic level – once a month / once a quarter / once a year.”
The more frequently you check your portfolio, the more painful your investing experience will be. The more you look at your portfolio balance, the more frequently you’ll observe both losses and gains, but as Nobel winner Daniel Kahneman has shown with prospect theory, we experience losses as more painful than gains are rewarding (somewhere on the order of 2:1). Thus, the more you log in and check your portfolio balance, the more painful your ongoing investing experience is.
To drive this point home, I created a series of charts. Using the returns on the S&P 500 index, I calculated the frequency of negative returns over different observation periods (daily, monthly, quarterly, and annually). That is, at each inspection period, how often would you experience the pain associated with your account balance declining.
By checking your portfolio daily, you will experience a loss on nearly half of all days—feeling “pain” roughly 116 of the 250 days the market is open each year.
By simply modifying your behavior to check your portfolio monthly, you’ll reduce observed losses to less than five timeseach year on average (40% of all months).
Taking this further, by checking returns quarterly you would experience a loss around 1.3 times on average each year (34% of all quarters).
And finally, by extending the observation period out to one year shifts the chances of experiencing a loss to once every five years.
Wiggins concludes his advice to “check your portfolio less frequently” with a suggestion on how to reduce the temptation:
A gentle nudge for private investors is to set a password for your investment account that is difficult to remember and store that password somewhere it takes a modicum of effort to retrieve. Making something that little bit more difficult, can have a dramatic impact on our behaviour.
It’s not that staying informed about your portfolio and monitoring results is a bad thing; it’s just that in today’s always connected, smartphone-centric world making it more difficult to access certain distractions can be a helpful step.
I can report this is an effective strategy. For me, one of these “certain distractions” is Twitter. It’s a valuable tool I use to interact with other investment professionals, stay current on market news and discover new research. It can also be a big distraction. To reduce it, I’ve deleted the app from my phone and setup a long password through a password manager to reduce the frequency in which use the platform. If you have a problem taking the long view with your investments, perhaps this will work for you too.
Transparency, 24/7 access, and the ability to monitor investments results in real time is, in isolation, a good thing. However, if you’re an investor that’s looking to eliminate some of the short-term noise with your investments and focus on your long-term plan, taking a lesson from bond investors and putting your portfolio in a drawer can help. The less you check your account, the less pain you’ll likely experience and like Gene Fama’s metaphorical bar of soap, the more money you’ll have in the end.
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Cordant, Inc. is not affiliated or associated with, or endorsed by, Intel.
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