Stop Checking Your Portfolio — It's Costing You Money

How often do you check your brokerage account? Daily? Weekly? Once a year?

I know some people who check in almost hourly. They have to know what’s happening to their portfolio at all times of the day.

But that’s a terrible idea. And there’s evidence that shows it’s a terrible idea.

Behavioral economists Shlomo Benartzi and Richard Thaler studied the phenomenon of how frequently checking your portfolio affects your performance as an investor. And it all has to do with investor psychology.

According to the study, checking your portfolio daily results in a probability of negative returns of about 45%. If you only check once a year, that drops to 25%.

All this means is you’re more likely to lose money the more often you check your portfolio. When you track the day-to-day movements of your portfolio—and the positions in it—you’re more likely to lose sight of the long-term goal, which is to compound your portfolio over time.

Benartzi and Thaler call this “myopic loss aversion.” As Prof. Benartzi says, “If you check often you will see losses more often, and you will be scared to invest in stocks.”

It’s either that, or you secretly like losing money in the market while hoping for a lottery ticket win at the same time.

It’s not easy to get over this type of behavior. It’s an emotional experience for most people when they see losses in their portfolio. But it’s also unavoidable over the long term.

What’s important is how you deal with it in order to push past any short-term pain. That will help you see the big picture of compounding your wealth over the long run.

And that’s where my flight training – as I discussed last week – truly helped me become a better investor.

Now, I know most of you reading this won’t have had that same type of training. You don’t have the experience of learning how to compartmentalize things and slow down what’s happening around you when faced with an emergency. Like when almost all of the oil in the plane I was flying drained from the oil reservoir mid-flight.

But you may know what it’s like to wake up and see the markets crashing. And your portfolio declining by 20% or more.

It’s a shock to the system.

If you can learn how to slow things down, if you can learn to stop constantly checking your broker’s app on your phone, if you have a system in place, you can slay the demon that is “myopic loss aversion.”

It’s not easy. I know this from my experience trading currencies, sitting in front of my screens every day watching tick-by-tick movements in the currency markets.

Having a plan in place, a system that keeps you in check, will probably do far more for your portfolio—and your wealth—than almost anything else you do. Even if you know when it’s the right time to buy a stock. Or sell it.

Money isn’t made in the buying. It’s not even made in the selling. It’s made in the waiting. And waiting is always the hardest thing to do.

Which is why one of the best things you can do for your portfolio—and for your sanity—is have your own investing “check ride” that will help you learn how to overcome negative feedback.

Before I go on, it’s important to know that there’s a difference between an investor and a speculator. In fact, there’s a huge difference in how you treat investments versus speculations. Meaning the way you manage risk changes with how risky the assets are that you’re managing. (I’ll talk more about speculations in next week’s Strategic Edge.)

Investors are people who look to earn compound returns over the long term. By long term, I mean years, if not decades.

Investing is where your serious money belongs. It’s not for play. It’s what makes up the bulk of your portfolio.

All this means is that, so long as you buy right, you can sit tight and let it all play out. With the occasional investment “check ride,” as I’ll discuss below.

It’s really just a tool that helps you make better decisions in the end. A way you can adjust to the ever-changing situation of the markets.

Yet most individual investors I know never learned how to manage their risk, let alone their portfolio. Even if they’re successful in other areas of business.

They fly by the seat of their pants. Losing more than winning.

All they tend to see are dollar signs. And that’s what differentiates professional investors from everyone else.

Because professionals do the opposite. They know that to have any real success over the long run, they have to learn how to manage their risk. They have to know how to separate investments from speculations. And they have to have a way to control it all.

And that’s where the “check ride” – not unlike the one that helped me earn my pilot’s license – sets apart the winners from the losers.

Having an investing “check ride” in place can allow you to buy into a company. Then you can periodically check in without having to stress about the overall market.

The goal is more about how you allocate to those stocks once you decide what to invest in. And how to manage the positions after you hit the buy button.

When it comes to investments, besides the initial research into the company itself (i.e. looking at the underlying business), there are two things I ask myself before I click “buy.” How long do I plan on holding this position? How much do I allocate to it?

If I plan on holding a position for decades, then I typically buy it and don’t look back.

If I only plan on holding it from, say, three years to 10 years—a medium-term position—I’ll pay slightly more attention to it.

And as the overall market shifts, that’s where your “check ride” comes into play.

Ultimately, you want to go through an exercise that helps you make decisions about your portfolio in a methodical way. That helps take out the emotional side of investing. Or what leads to making horrible decisions.

Do this over and over throughout your investing lifetime, and it will almost become second nature. It’s a system that helps keep you in check and ultimately keeps your portfolio in far better health.

So for investors, a typical “check ride” may look something like this:

1.       What is the state of each position in my portfolio?

2.       Is each company performing as I expected?

a.       If no, write down the reasons why.

b.       If there’s no reason to see that performance turn around, sell.

3.       Are there any companies whose business might be in trouble?

a.       If yes, sell.

4.       How much does each current position make up of my overall portfolio?

5.       Do I have too much invested into any one company?

a.       If yes, sell enough to bring it back in-line.

6.       Do I have too much exposure to a specific sector or market?

a.       For example, do I own too many tech stocks?

7.       Can I handle a potential double-digit drawdown in my portfolio during a bear market?

8.       Where are there potential weaknesses in my portfolio?

9.       How can I fix them?

10.   Do I own enough wealth insurance?

a.       If no, consider raising enough funds to buy that insurance.

That last point may have some of you confused. When I say wealth insurance, I mean things that will help you sleep easier at night. Like having enough cash on hand for emergencies. Or one of my favorite things, physical gold.

It’s a sort of stabilizer for your portfolio. Kind of like the flaps on the wings of a plane that stabilize it when it’s on final approach.

Regardless, doing a portfolio “check ride” about once a year is a good habit to have if you’re managing your own money. It helps you stay away from making rash or emotional decisions.

And keep in mind that the questions on the sample “check ride” aren’t set in stone. You may have others that may make sense for your personal situation. They’re more of a guide of what even a novice investor can use to help make them better prepared for the whims of the stock market.

Becoming a better investor isn’t as difficult as it may seem. The more you learn how to manage your core portfolio instead of being spontaneous, the better results you’ll most likely have in the future.

Regards,

Editor, Strategic Trader

P.S. Stay tuned for next week when I dive into the “check ride” for the more speculative side of investing.