James Sweeney No Comments

Many investors feel an almost compulsive need to check their account values on a regular basis, sometimes daily or even multiple times a day. This is a recipe for disaster. Daily, weekly, and even monthly price changes carry almost no useful information and the stress of seeing the constant rises and falls is almost certain to cause an emotional and potentially harmful reaction.

Illusion of Control

People who check their balances frequently feel more in control by watching in real-time. Of course, few would probably admit this is their reason for constantly checking, but the reality is, we are hardwired to believe we have more control over these situations than we really do.

I remember an old movie called Maverick – a Western-style movie starring Mel Gibson as a reckless, but lucky, poker player. Gibson is obsessed with being able “will” a card to be the one he needs. At the end of the movie, he actually succeeds in doing so. (At least he believes that’s what happened)

This sort of thing may seem a bit silly and superstitious, but millions of people today must believe they have at least a little bit of that power.

If not, why would sellers of lotto tickets let the purchasers pick their own numbers? They could easily assign a random number to each ticket. But they allow people to feel in control of their own destiny by picking numbers.

In a similar way, investors checking their accounts – maybe making little tweaks here and there – makes them feel like they are the one controlling the outcome, rather than the markets.

Fooled by Randomness

Another issue with checking so often is that there is really no information in short-term price movement of the stock market. In his book Fooled by Randomness, Nassim Nicholas Taleb gives an example of an investment that averages 15% per year with ±10% variability (not exactly the stock market, but a decent approximation).

With that return profile, you would expect to get a positive return 93% of the time, when looking on an annual basis.

But what if you look every day? How often would you expect to see a positive return?

Answer: Only 54% of the time!

Barely over half! If you are looking at your account every day, you are going to have an awfully bumpy ride.

There are two problems with such a bumpy ride.

First, as humans, we are wired to look for patterns in everything. That tendency helped us survive for a long time. From interacting with others to predicting the weather, our ability to discern patterns came in very handy.

However, our obsession with extrapolating the past and looking for patterns can get us in trouble in investing. The stock market experiences at least 10% drawdown nearly every year. If we assume that the world is going to collapse every time the market has a few bad weeks, we will miss out on the mostly positive returns that the market generates after those downturns.

Second, research shows that people feel the pain of losses about twice as much as the pleasure of gains. In other words, a 1% loss hurts twice as much as a 1% gain feels good. So, if the market has negative returns almost half the days of the year, and you feel those losses twice as much as the positive days, investing is going to be incredibly painful if you check your account every day.

How to Resist the Urge

In summary, checking your account everyday is bad for your emotional and financial health. Here are a few tips that may help you get over the temptation and enjoy life instead.

  1. Have a long-term plan. if you’re not sure what your goals are or why you’re investing, you may hyper-focus on short-term results. If you can match your investments to your goals (ie risky investments for long-term goals, and more conservative investments for shorter-term goals) you are more likely to be able to sleep at night.
  2. Understand what you are investing in. I see a lot of first-time investors tempted to check their accounts constantly. They aren’t quite sure what their getting into and fall into the illusion of control trap. Checking balances everyday won’t help you get over that. But learning more about investing can. I also see investors dabbling in spaces they aren’t truly comfortable (think Bitcoin, penny-stocks, etc.) who fall into the same trap. This is yet another reason to stick with more plain vanilla investments, with long-term histories of positive returns.
  3. Find another hobby. Investing can be enjoyable, but most people I know who are obsessed with checking their account balances are more stressed than happy. They look like the people I see at the slot machines in Vegas, surrounded by lights and sounds, but they don’t look happy. They look miserable. If investing is stressing you out, consider a long-term, buy and hold approach, and find something more fulfilling to spend your free time.

To learn more, you can schedule a complimentary, no-obligation introduction. Just click here.

You can also visit my website at switchpointfinancial.com, email me at james@switchpointfinancial.com or call 801-753-8538.