Dan Egan writes that Investors often focus on information that isn’t typically useful, such as recent performance. Monitoring performance tends to result in stress, unhappiness, and can even end up reducing your returns. He believes most people check on their investments far too often. If they fully understood them, they’d spend less time monitoring their accounts, and more time gaining knowledge about investing.
Checking on your investments frequently, which to Egan means more than once a quarter, may: Make you more risk-averse than you probably should be; Mislead you about the future returns you might accrue; Increase your risk of performance chasing, which could reduce your returns; Make you unhappy with your portfolio, regardless of the actual performance.
If you’re checking the performance of the stock market daily, chances are that you’ll see a loss about 50% of the time. If you check on it just once a year, that chance drops to about 25%. At seven years, the chance of seeing a loss drops to 1%.
Looking at short-term returns when you’re investing for a long time may feel riskier than it actually is because you’re paying attention to those short-term losses. Even though you might see immediate losses, staying invested for a longer period of time means that those losses may turn into gains if the market goes up. Since the market generally tends to move in an upward direction over time, the likelihood you’ll see gains generally increases as time increases.
You can think of your portfolio as if it were a friend’s small child. If you look at a child every day, you probably won’t notice any changes. If you want the joy of saying “Oh my, how you’ve grown,” then you’ll need to space out those visits more.
What is the right way to review the performance of our investments?
- Showing the performance of your whole portfolio, not just the individual funds/shares inside of it. We built a diversified portfolio for a reason, after all.
- Showing total returns, which include price changes and dividends together, instead of breaking them out separately. Price changes alone are more volatile than total returns and don’t show the overall picture.
- Showing your performance over as long of a period as possible, rather than in short time frames, to help reduce the feeling of loss aversion.
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