Why Constantly Checking Your Portfolio Can Hurt Long-Term Wealth?
In the constantly connected digital world, many investors are prone to checking our portfolio returns daily and, in extreme cases, many times in an hour.
In an era where investing apps offer real-time insights into our financial portfolios, the temptation to constantly monitor investment performance has never been greater.
This high-frequency monitoring might seem like diligent financial management, but it could be a pitfall for long-term wealth creation.
The Psychology Behind Constant Investment Monitoring
A downside to constant investment monitoring is that it can skew investor perception, making portfolios seem to perform worse than they are.
This phenomenon leads to myopic loss aversion, where the fear of losses outweighs the satisfaction of gains.
This portfolio performance anxiety could lead to noticing short-term fluctuations, which can trigger emotional stress and impulsive decision-making.
The Impact on Long-Term Investment Strategy
Constant monitoring often results in knee-jerk reactions to market performance, disrupting well-planned investment strategies. This behaviour can hinder the natural growth of investments, which typically requires time and patience.
The Research on Portfolio Checking Frequency
Myopic Loss Aversion and Investment Risk
Research supports the idea that less frequent portfolio reviews can lead to better investment decisions. Experts state that checking your portfolio quarterly instead of daily can halve the likelihood of witnessing a moderate loss, thereby reducing emotional stress and the urge to alter asset allocation impulsively.
How Often Should You Check?
Many wealth managers advise investors to check their portfolios as infrequently as possible. Limiting portfolio reviews can significantly benefit long-term investment outcomes, as it helps maintain a steady course despite market volatility.
Regulatory Perspective
Guidelines for Mutual Funds
The Association of Mutual Funds in India (AMFI) has set new standards for how asset management companies (AMCs) should showcase investment returns. AMFI's directive to use a 10-year compounded annual rolling returns (CAGR) model aims to provide a more realistic and less speculative view of potential investment outcomes.
Implications for Investors
These guidelines mean investors will see more standardised and potentially conservative performance projections. This move by AMFI aligns with the broader theme of encouraging a long-term view of investment returns rather than focusing on short-term gains.
A Watched Kettle Never Boils
When this idiom is applied to the world of finance, the phrase underscores the idea that constantly monitoring your investments can make it seem like they are growing more slowly.
This perception is particularly relevant in the context of long-term investments, where the real benefits are often realised over several years or even decades.
Here's how the idiom relates to various aspects of investing:
1. Perception of Time and Growth: Just as watching a kettle can make it seem like it's taking forever to boil, frequently checking on your investments can create a false impression that they are not growing significantly. In reality, investments need time to mature and can experience short-term fluctuations that are normal but can be unnerving if monitored too closely.
2. Emotional Reactions and Decision Making: Constant monitoring can lead to emotional reactions to short-term market volatility. Investors might feel compelled to make impulsive decisions, like selling off assets during a temporary market dip, which can be detrimental to long-term investment goals. This is akin to giving up on waiting for the kettle to boil and turning off the stove, only to have to start all over again later.
3. The Importance of Patience: The idiom also highlights the virtue of patience. In investing, patience is a key component of success. Long-term investments, such as retirement funds, often see the best growth over extended periods. Constantly watching these investments and worrying over short-term losses or gains can be counterproductive.
4. Compounding Effect: The power of compounding – where you earn returns on your returns – takes time to manifest. A watched investment might seem stagnant in the short term, but given enough time, the compounding effect can lead to significant growth, much like how a kettle eventually reaches a boiling point if left undisturbed.
5. Behavioural Finance: From a behavioural finance perspective, the idiom reflects the human tendency to overestimate the impact of short-term events and underappreciate long-term trends. This can lead to overtrading, increased transaction costs, and ultimately, a potential reduction in overall investment returns.
"A watched kettle never boils" serves as a metaphorical reminder for investors to focus on long-term strategies, avoid overreacting to short-term market movements, and allow their investments the time they need to grow.
Just as a kettle will boil in its own time, investments will typically grow if given enough time and the right conditions.
The Path to Sustainable Wealth Creation
The key to successful investing lies in balancing the need for information with the wisdom to avoid overreacting to market fluctuations. By adopting a long-term investment approach and resisting the urge to constantly monitor short-term returns, investors can align their strategies with sustainable wealth accumulation.
How Constant Monitoring Affects Investment Behaviour?
Overtrading and Chasing Performance
Checking your portfolio too often can lead to overtrading. Overtrading means buying and selling investments too frequently. This occurs when small daily price changes create a fear of missing out or prompt investors to chase quick profits. Instead of letting investments grow naturally, constant trading adds costs, taxes, and often lowers returns. For example, reacting to a one-day fall by selling stocks can make you miss the recovery that follows.
Breaking Long-Term Strategies
Every investor begins with a long-term plan, whether it’s saving for retirement, children’s education, or building wealth. Constant monitoring makes it more difficult to adhere to this plan. Short-term fluctuations may tempt you to adjust your allocation of stocks, bonds, or gold. This act of breaking the strategy disturbs the balance of risk and return. Staying invested and disciplined is more effective than reacting to daily market noise.
Increased Stress and Mental Fatigue
Constant notifications and real-time updates can cause investment anxiety. Watching frequent losses, even small ones, often feels more painful than the joy of seeing gains. This effect, known as loss aversion, can negatively impact decision-making. Over time, this can lead to mental fatigue and stress, ultimately reducing confidence in your financial journey. Wealth creation requires patience, not constant worry. At Bondbazaar, the focus is on helping investors adopt a long-term perspective that supports sustainable growth.
When Should You Actually Check Your Portfolio?
Periodic Reviews (Quarterly/Semi-Annually)
A good practice is to check your portfolio every 3-6 months. This provides sufficient time for investments to yield meaningful results. Quarterly or semi-annual reviews help you rebalance your portfolio if one asset, such as shares, grows disproportionately compared to bonds. It avoids knee-jerk reactions while keeping you aligned with your goals.
During Major Life Events or Financial Shifts
You should also review your portfolio when facing major life events. Examples include marriage, buying a home, a career change, or nearing retirement. Big financial shifts, such as changes in income or expenses, may also require adjustments. In such moments, checking your portfolio ensures it still matches your needs. Bondbazaar recommends treating portfolio reviews as purposeful actions rather than impulsive habits.
Investment Journey Not A Sprint
Investing is like a journey, not a sprint. Frequent portfolio checks might offer temporary reassurance or excitement, but they can also lead to decisions that are detrimental to long-term financial goals.
Trust your investment strategy and understand the nature of market fluctuations.
Frequently Asked Questions
1. How often should I check my investment portfolio?
For most long-term investors, checking a portfolio every three to six months is ideal. This frequency allows you to track progress, rebalance assets if needed, and make adjustments without overreacting to short-term noise. Daily monitoring adds little value and can create stress. A periodic review ensures you stay aligned with your goals while still giving your investments the time they need to grow.
2. Is it bad to check my portfolio every day?
Checking daily can be harmful. Markets move up and down all the time, and these short-term swings can cause unnecessary worry. Daily monitoring increases the risk of impulsive actions, such as selling too soon or chasing quick gains. Long-term wealth creation needs patience. By focusing too much on daily changes, you may harm your strategy instead of supporting it.
3. What happens if I completely ignore my portfolio?
Ignoring your portfolio entirely can also be a risky move. Over time, your investments may drift away from your original goals or risk level. For example, if stocks rise sharply, your portfolio may become too risky without you noticing. That’s why periodic reviews are important. They help you stay on track without the stress of constant monitoring.
4. Why do I feel anxious when my portfolio drops?
This occurs due to loss aversion, a human bias where the pain of losing money feels stronger than the pleasure of gaining it. Even small losses can trigger stress. Constantly watching your portfolio makes these drops more visible and increases anxiety. Understanding that market dips are natural and temporary can help you remain calm and focused on your long-term goals.
5. How can I stop myself from obsessively checking my investments?
Set a review schedule, for example, quarterly or semi-annually, and commit to it. Remind yourself that investing is a long-term process and short-term moves don’t define success. You can also mute notifications, focus on your financial goals, or seek guidance from experts. Bondbazaar encourages disciplined investing, helping you stay patient while your money grows over time.