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  • ProCervo Thoughts & Musings

A watched pot never boils: why you should not check your portfolio too often

When you have finally taken the leap and put some money in the market, it is perfectly normal to feel excited. You will want to check what your investment is doing. You want to see that you are making money. You want to feel smart about your decision. If the investment does not move fast enough and in the right direction, you will feel tempted to jump on another horse by selling this position and moving to something else. All this is perfectly natural. But it is a very bad idea for a number of reasons.

The most obvious is that investment returns are not achieved in minutes/hours/days/ etc. but in months or years. On the way to a good return, you will see a lot of ups and downs that have nothing to do with your investment thesis (that is the reason why you bought the stock). You will see the Amazon (AMZN) share go down after the company said that it has made less money in the last quarter (the last three months) than the market expected. Say, a distribution centre had problems and the company could not get the goods as quickly as usual. Should you see? Should you buy? Or you have seen headlines in the paper that the economy will not do well in the coming months. What should you do? The answer is most certainly: nothing!

If your company is not been structurally broken since you bought it, there is very little reason to panic. If the government were banning e-commerce, sure you should see the stock. You may want to go through your notes on why you bought the stock in the first place and see whether any of your main assumptions have changed. Only if there are new fundamental issues is it worthwhile trading.

Ben Graham, the father of investment analysis, has described Mr Market as a manic depressive: sometimes euphoric and sometimes depressed, so there will always be volatility (market prices swinging up and down) for no specific reason. Even if markets go up in the long run, as they have been in recent years, taking too many snapshots of your portfolio means that you are unlikely to see it happening.

Nassim Nicholas Taleb, the investment thinker of Black Swan fame, illustrates this with a simple example in his book Fooled by Randomness:

“A 15% return with 10% volatility (or certainty) per annum translates into a 93% probability of success in any given year. But seen at a narrow time scale, this translates into a mere 50.02% probability of success over any given second”

So, if you checked your portfolio every second, you would spend almost half your time worrying about losses while over the timescale of a year you would almost certainly be ahead! Why does that matter? Humans are geared to feel pain more intensely than pleasure. More relevant for this topic is that investors suffer from losses significantly stronger than they enjoy gains, the so-called 'Loss Aversion'. It is difficult to quantify loss aversion but those who tried found that the gain had to be 2-4x bigger than the loss to make people happy on balance. Finding 200-400 coins in the street makes you as happy as losing 100 coins upsets you. That is a big number! If you check your portfolio every second and half the time it is down, you are almost certain to be unhappy over the long term! That’s a bad way to spend your time, right?

There is also a significant risk of impulsive trades. These are never a good idea. Good hit rates (investments that go up after you buy them) are 60% at the best of times. It is almost impossible to take a decision under stress that is anything but random.

Finally, you are definitely going to have a higher turnover (the number of times that you buy and sell a position). There are costs associated with that, the most obvious being trading commission and taxes. If you think that you are unlikely to create value by jumping in and out of position, you are giving that money away for nothing.

So what can you do? The most obvious solution is to wean yourself off the real-time course feeds and just check in at regular, extended intervals. Say once a month and out of trading hours, e.g. on weekends? That way you see the change in your portfolio with a lot less noise. There is a cooling-off period built in that will allow you to change your mind after an impulsive trade.

If you are like me and you just cannot stay away from the flashing lights of the market for longer than a day, then - again - check at least outside market hours. If your portfolio is sufficiently big you can have some small positions in there that you can trade to “self-soothe”, i.e. trade something for the feeling of having something. This will not protect you from the harm to your mental health of checking too often but at least you will not do as much harm.

Like the water in the title will eventually boil, a well-diversified portfolio will perform over time. Worrying about the temperature too often will not speed it up.

How often do you check your portfolio?

  • All the time!

  • Once a day

  • Once a week

  • From time to time, don't really know


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