Checking your portfolio is bad for you: Behavioural Economics
It’s so tempting isn’t it. When you are waiting in the line for a coffee, bored at lunch, etc. Just tap on your phone and see how your portfolio is tracking.
It feels so good to a green % number. So nice to validated that you picked the right stock or ETF.
But ... according the behavioural economics, checking your portfolio is bad for you!
Daniel Kahneman won a Nobel Prize in Economics for coming up with this insight (Read his best seller Thinking Fast & Slow). His research in Loss Aversion shows that we value not losing something far more than gaining something. He shows this through the example of a coin toss. If it lands on heads you lose $10. How much do you need to win if it lands on tails?
His research shows that people demand a pay off of more than $20 to take on the risk of the flip. If we looked at maths rationally, a pay off that is more than $10 should be sufficient for us to play. Anything higher than $10 for tails would have an expected return of more than $0 - i.e. 50% chance of $0 + 50% chance of $11 = $1 expected return. If we flipped the coin enough times, we are guaranteed to win. Basically, we are willing to leave money on the table in order to avoid the risk of loss.
How does this translate to your portfolio
In the last 3 years, the ASX ended the day higher in 370 (49%) out of 758 sessions and traded down on 388 (51%) sessions. This means you are more or less equally likely to see you portfolio is Red or in Green on any trading day.
But, when you see your portfolio in the red for the day, you feel much worse than the pleasure of seeing it in green. This negative emotion may drive you to make bad trades. This will not only hurt you mentally but also financially.
So you should never check at all?
If you are naturally curious and want to scratch that itch of knowledge, what do you do?
My suggestion is to change your perspective when you check your portfolio.
When looking at your portfolio, remind yourself about your investment strategy. Having a plan is important here.
At BetterWealth, we believe in a long term buy and hold strategy. Markets moving up and down. It is just part of the investment strategy we’ve factored in. In this perspective, we know not to trade out of a poor performing ETF, or buy into a high performing ETF.
When you next check your portfolio, just see it as a data point contributing to your overarching investment strategy. Don't make any rash financial / investment decisions - especially when you are emotional.
Will you check your portfolio now?