This is part two of a guest post series from Monevator [1], a personal blog that provides money tips and motivation for private investors. You can find:
- part one – Beat Market Volatility by Being Boring [2]
- part three – Why you Should Invest When the Market is Falling [3]
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 [4] 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 [5] such as stocks and bonds [6].
You’ll almost certainly end up richer than the day trader [7] next door.