This is part two of a guest post series from Monevator, a personal blog that provides money tips and motivation for private investors. You can find:
- part one – Beat Market Volatility by Being Boring
- part three – Why you Should Invest When the Market is Falling
Strategy 2: Try to ignore your portfolio for months at a time
Even better than a boring account is one you don’t bother checking at all. It might seem ridiculous not to watch your portfolio like a hawk, but if seeing your net worth fluctuate makes you unhappy and scares you out of the stock market, then checking your performance is counterproductive.
Warren Buffett famously implores investors to buy stocks for the long-term, and he’s done quite well. How long is long-term? Certainly longer than the horizons of private investors who check the prices of a stock they bought 60 minutes after assuming ownership. (Yes, that includes me! Editor’s note: Me too!)
Buffett once said, “I buy on the assumption that they could close the market the next day and not reopen it for five years”. Buffett is so confident in the businesses he buys that the daily fluctuations in their value aren’t a concern. I wouldn’t go that far – I’m not as sure of my ability as I am of Buffett’s – which is one of many reasons why I’m not as rich as him. But I can tell you that checking your portfolio every day (let alone every hour) is guaranteed to make you unhappy.
The reason is that while stocks, in aggregate, have always gone up over the truly long-term, their value can go anywhere over shorter time periods.
Nassim Taleb illustrates this really well in his excellent book, Fooled By Randomness. Assume, Taleb suggests, that you are investing in a market with 15% returns and 10% volatility per annum. This equates to a 93% probably of success in any given year. Pretty good odds, eh? Over shorter timescales, though, the picture is different.
Here are the chances of success with Taleb’s example investment over different timescales:
Scale – Probability
1 year – 93%
1 quarter – 77%
1 month – 67%
1 day – 54%
1 hour – 51.3%
1 minute – 50.17%
1 second – 50.02%
Personally, I find these figures really interesting. In the ultra short-term, even an ultimately successful investment is barely more likely to be up than down.
Now, Taleb asks us to imagine a fictitious dentist who checks the above investment every day.
At the end of every day the dentist will be emotionally drained. A minute-by-minute examination of his performance means that each day (assuming eight hours per day) he will have 241 pleasurable minutes against 239 unpleasurable ones.
Psychologists have shown that we feel pain from losses more than we feel pleasure from gains. Over the short-term, the pain of seeing losses from our stocks will outweigh the pleasure. The danger then is we sell out to stop the pain.
In contrast, if the dentist only checked his portfolio once a month, then as 67% of his months will be positive he’d have only four miserable sessions per year, versus eight good ones.
Checking yearly, he’d be even happier with his performance. Only in one year out of 20 would he drill unnecessary holes on unsuspecting patients to work off his anger. The other 19 years, he’d be thrilled.
Taleb’s specific investment is invented, but it is directly comparable to investing in the stock market. Most of us hold our investments for the long-term, yet we monitor their performance regularly over short periods of time, exposing ourselves to inevitable anguish.
Over 40 years of our investing for retirement, history suggests investors in stocks will do very well. Over a month, let alone a day, almost anything can happen.
So why worry too much along the way? If you’re not a stock market junkie, don’t become one.
Have faith, and keep up with regular investments. Check your portfolio once a year, where you might also consider rebalancing between the various asset classes such as stocks and bonds.
You’ll almost certainly end up richer than the day trader next door.
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{ 3 comments… read them below or add one }
Love this series….
The idea of not checking your portfolio is pretty much what my entire blog is about, hence the name.
Also, I have a copy of Fooled by Randomness waiting to be read. (Currently working through Random Walk.) You just motivated me to read a little faster to get to it. 🙂
It makes sense in theory to ignore the portfolio at months at a time but it’s extremely hard to do! Are you seriously going to be able to not look at your performances?
I completely disagree with ignoring the portfolio for a long time as a strategy. I am a fan of Taleb’s book, but his point is based on an assumption that a person only sells once after buying. If one repeatedly buys and sells by taking advantage of volatility, then that person can come out ahead. I do it in small chunks, $500 to $1,000 per fund at a time. If I get 3% more shares at each sale by selling then rebuying and I do it 4 times, then I earn ((1.03^5) – 1) or 12.5%! I do this with mutual funds in my 401K where there are no trading fees, but I have to wait until the excessive trade deadlines pass, (usually 30 or 60 days).
By looking at your funds only once a year, how do you know you’re looking and rebalancing at one of the more fortuitous, extreme times? One must take advantage of volatility by looking and seeing when things are down or up as these don’t always happen at the end of a quarter or at the end of a year.
The key is not to panic and follow some rules as to when you’ll make these trades. Even in a bull market, there is enough volatility that prices go down 3% or so every now and then. The same holds true in a bear market; prices will occasionally go up 3% over some interval. And you don’t want to buy or sell all of your holdings in a given fund because you might lose out on overall long term growth. Just do it in small chunks. If one fund goes up, another is bound to go down over the same time period. Doing it with a few percent of swings locks in the benefit of volatility little bits at a time.