With a 24/7 news cycle and instant access via Smartphones, tablets, and the Internet, disturbing news is a click away. Instantly you can see how your stocks are reacting. But how often should you check on your investments?
Brandes Investment Partners, a money management firm in California, published a wheel-like chart showing what happens when an investor checks a portfolio daily, monthly, quarterly, and yearly. The source of the data is Fooled by Randomness: The Hidden role of Chance in Life and Markets by Nassim Nichols Taleb (W.W. Norton & Co., October 2001).
As chronicled in the book, “According to Prospect Theory, for every good result you see, you gain one Emotional Unit. Since a loss has twice the impact on your emotions, for a bad result you lose two (Emotional Units).” Obviously, on days the market is up, you feel good and a tad richer. If the value of your portfolio is down, worries creep in and you feel less rich. “The more often you check the more stress you feel.”
Find out what's happening in Peachtree Cornersfor free with the latest updates from Patch.
“Is too much information stressing you out?” How often do you check your returns? Does nervousness and fear sometimes cause you to abandon what may be a good long-term investment?
Warren Buffett is one of the great all-time investors. Yet click on www.bigcharts.com and look at a ten-year performance chart for Berkshire Hathaway stock (BRK.A), Buffett’s company. Note the many peaks and valleys over time, including periods of 18 months to several years before the stock returned to a previous high and moved higher. At what point would you have fired Warren Buffett? Emotions play heavily in investor success.
Find out what's happening in Peachtree Cornersfor free with the latest updates from Patch.
Looking at a purely hypothetical investment over 20 years with an annual return of 15% and volatility per annum of plus or minus 10%, if you check values daily you have a 54% chance of seeing a gain. You gain 3,943 Emotional Units while losing 6,716 Emotional Units. Emotionally you wind up with a ratio of 1:2 gains versus losses. You do not feel so good, sporting a nervous frown.
Check monthly and odds improve with a 67% chance of seeing a gain. You gain 161 Emotional Units while losing 158 Emotional Units. Emotions are starting to balance out at almost 1 to 1. You feel better.
Check quarterly, and, wonder of wonders, you have a 77% of seeing a gain. You are up 62 Emotional Units and down only 36 Units, for a positive ratio of 2 to 1. You get a smiley face!
While we seriously doubt that anyone could do this, if you check only once a year, you have a 93% of seeing a gain. You are up by 19 Emotional Units and down by only two Units. Emotionally, you wind up with 10:1 gains versus losses. That rates a big, almost giddy grin!
We are not suggesting that when it comes to your investment policy you should merely set it and forget it. But too much checking can lead to emotional stress and the making of unwise moves trying to capture the next big thing or avoid a temporary loss. Your situation may change and your risk tolerance may change over time. If you have different asset classes, periodic rebalancing may be called for.
John Templeton advised, “Buy when there is blood in the streets.” That’s hard to do when fear is running rampant and the talking heads are all gloom and doom. Conversely, it is hard to take a profit when a stock is soaring. Remember Apple at $705 a share in September 2012? The stock was up 800% between 2009 and the 2012 peak. Apple still is a great company, so what happened? Questions arose about Apple’s ability to keep out-innovating increasingly aggressive competitors. Emotions changed and the fall was rapid to a recent 52-week low of $385 per share. Never be afraid to take a profit, especially if a stock comprises a disproportionately large share of your portfolio.
But sometimes you need to just go to the beach or the mountains and turn off the noise. Silence is a balm for the psyche!
Lewis Walker is President of Walker Capital Management LLC. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ▪ 3930 East Jones Bridge Road ▪ Suite 150 ▪ Peachtree Corners, GA 30092 ▪ 770-441-2603 ▪ lewisw@theinvestmentcoach.com