It has been uplifting for stock market investors to look at their investment portfolios after the 31% run up last year. Watching the investment account balance soar is a high, when markets are soaring. But what about in less pleasant markets?
In 2008, the stock market dropped more than 36% and in 2018, the S&P 500 saw a 4% decline.
If you get in the habit of frequently checking your investment balance, you might be tempted to act on the results. Here’s why checking your portfolio too often can be a problem.
Why Are You Investing?
Before deciding how often you should look at your investment portfolio, get clear about why you’re investing.
For most people, investing in the financial markets is a way to build wealth for long-term goals like retirement or paying for your son or daughter’s college education. In fact, money in the financial markets should be earmarked for long-term goals because in the short term, there’s a real risk of a market drop.
If you have $50,000 in an investment account this year, earmarked for a home down payment next year, what happens if the market falls 20% this year? Your home down payment fund will blose value instead of appreciating, leaving you short the money for that new home.
So that’s why the correct answer to “Why are you investing?” is: for long-term goals.
If that is the case, then there are disadvantages to checking your investment balances too often.
How Often Should You Check Your Investments?
You should check your investments no more than quarterly for individual stocks.
If you’re a fund investor, there’s no need to check your investments more than a few times per year.
It might sound strange, to only check the value of your investments a couple of times per year. Yet, the reason for infrequent investment checking is to avoid temptation to trade.
The disadvantage to checking your investments more frequently is that looking at the account balance more regularly might cause you to trade, and more frequent buying and selling leads to worse returns.
Terrance Odean, finance professor at UC Berkeley, found that overconfidence and frequent trading lead to worse investment performance. Along with co-author Brad Barber, Odean explains that after trading costs, the buy-and-hold investors outperformed the most active investors by approximately six percentage points a year. This research was reported in “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors,” in The Journal of Finance. The investigators examined over 61,000 trades from a major brokerage firm from 1991 through 1996.
Additionally, other researchers also uncovered links between more frequent trading and underperformance.
So, by checking your investments infrequently, you have the opportunity to save yourself from making bad investment decisions.
After a market drop, its common for investors to get scared and sell. This action will lock in their losses and create another problem. After leaving the market, you need to decide when to re-enter. Get back in too late and not only have you locked in your losses, but you may miss a large percent of the market rebound, as the down market begins to go up.
From Jan. 1, 1999 to Dec. 31, 2018, if you missed the 10 best days in the stock market, your average return was cut in half, according to J.P. Morgan Asset Management’s 2019 Retirement Guide. If you were fully invested in the S&P 500 during that 20-year period, your annualized return would have been 5.62%. Had you missed the best 10 days, your return would have been 2.01%. Missing the best 20 days slashes your annual return to -0.33%.
This research isn’t just an anomaly, other researchers during differing time periods have found similar results.
The explanation is that investors are very poor at timing the markets and supports the idea that the more frequently you check your investments, the more likely you are to buy or sell, which ultimately may hurt your investment returns.
How to Avoid the Perils of Checking Too Frequently
Decide your investment goals in advance and create a plan. Then, stick to the plan. Understand the investment markets and how they behave.
Many investors prefer to use an investment advisor to help them stay invested and make the appropriate investment decisions. Robo advisors like SoFi Invest, Betterment, Wealthfront and others make it easy to have your investments managed for low fees. With someone else managing your investments, you’re less likely to trade frequently.
Whether you use a robo-advisor like Betterment or Fidelity Go, automated and well managed accounts will help prevent you from jumping in and out of the markets.
Finally, only you can help yourself from over trading and making harmful investment decisions. Consulting a financial advisor, using an automated robo-advisor, and educating yourself about investing will help. Ultimately, infrequently checking your investment values will guide a focus on the big picture, not the normal ups and downs of the financial markets.
Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor Pros.com, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Finance.com. Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she did not hold a position in any of the aforementioned securities.