By: Edward J. Leach, CFP®, MBA
In times of market stress, our fear prompts us to look at portfolio returns more frequently than we probably should. Our brains are wired to look for signals and this leads us to believe that we can see signs of a potential loss before it happens.
Unfortunately, most of the time, making portfolio changes in the midst of short-term volatility only results in realizing taxes, trading costs, and missed opportunity when the markets recover.
The study of our emotional response to money is known as behavioral finance, and the body of evidence has shown investor behavior is the greatest cost to reaching long-term goals.
So, what can we, as your advisors, do to help you stay focused on the long-term view and your reaching your goals, rather than looking for signals of doom and disaster?
Collaborative financial planning is our most powerful tool to help put clients’ concerns in perspective and manage investor behavior. However, we cannot be there every minute of the day while you are watching network news, reading your twitter feeds or browsing the internet.
There is one piece of advice we can give that, if followed, can help you to manage your emotions during periods of uncertainty. Don’t look at your portfolio!
If only it was that simple, but it is, if you can change your habits with the type and frequency of information you take in.
Try limiting yourself to 30 minutes of news per day, and only look at your portfolio once per month or even once per quarter and avoid all financial twitter and internet browsing. Try this for three months and see if you feel any different about things.
The series of charts below show the visual evidence for not watching your portfolio over varying lengths of time using the S&P 500 over the last 20 years:
If you looked at the S&P 500 once per month – pretty volatile
If you looked at the S&P 500 once per year – hmm not too bad.
If you looked at the S&P 500 once every 5 years – the lost decade jumps out but where is the financial crisis?
If you looked at the S&P 500 once every 20 years – sign me up for this investment experience! What lost decade? What tech bubble? What financial crisis?
Feeding our emotional triggers with frequent doses of information in the hope that we identify a signal to do something, does not improve our odds of success. Periodically reviewing our situation and making prudent decisions is more effective when we avoid monitoring the frequent noise that exists on a daily, weekly and monthly basis. Hopefully, this helps you keep perspective on your long-term investment time horizon.