Explain why investing feels riskier the more often you check.
Pick up your phone and look at where your broker or investment app sits. If it's on your home screen, estimate how many times you opened it in the past week. That number is worth knowing, because how often you look at an investment changes how risky it feels and what you end up doing with it.
In 1995, Shlomo Benartzi and Richard Thaler published a paper that named an idea they called myopic loss aversion. It joins two things. The first is loss aversion, the tendency to feel losses more than equal gains, which you met in lesson 2.2. The second is how often you evaluate your investments.
Together they work like this. The more often you look at your investments, the more often you see a loss. Each loss hurts more than an equal gain pleases, so checking often makes the same investment feel much worse, even when the final result is identical.
Benartzi and Thaler used this to help explain a long-standing puzzle in finance: why investors have historically demanded a large extra return for holding shares instead of safer assets. Their argument was that people who evaluate their portfolios often feel the frequent dips so strongly that they need a big reward to hold shares at all.
Take a made-up year. A portfolio starts at S$40,000 (an example figure). Its monthly returns, in order, are: up 3%, down 2%, up 4%, down 1%, up 2%, down 3%, up 5%, down 2%, up 1%, up 3%, down 1%, up 2%. By December it is worth about S$44,460, a gain of about 11% for the year.
Now look at the same year at different checking frequencies. If you check once a year, you see one result, and it is a gain. If you check once a quarter, you see four results and one of them is a fall, because the second quarter ends lower than the first. If you check monthly, you see 12 results and 5 of them are falls. If you check daily, you see red on a large share of days, because daily prices bounce around much more than the yearly trend.
A rising portfolio still has falling months. Someone who checks yearly experiences this portfolio as calm and rising. Someone who checks daily experiences the same portfolio, with the same result, as a long series of small losses.
Hui Min's habit is closest to daily checking. Her portfolio is meant for twenty years from now, but she keeps her broker's app on her home screen and checks it on the MRT in the morning, at lunch, and usually once more in bed. On a red day she feels a small knot in her stomach. On a bad week she reads market news at midnight. She is watching long-term money as if it were due next Tuesday.
The effect changes behaviour as well as mood. In the years after the 1995 paper, researchers ran experiments that gave people a choice between a risky investment, like shares, and a safer one, and varied how often they got feedback on the results. People who saw results more often tended to put less into the risky option than people who saw results less often, even though the investments were identical.
In real life this shows up in two ways. You may hold less in shares than your goals need, because shares feel much riskier than they are over a long horizon. Or you may sell during a fall, when day after day of red builds up until it becomes unbearable, often near a low point. Either way, checking too often can quietly lower your long-term returns.
You don't need to stop looking at your investments. Look on a schedule that matches what the money is for. For long-term money, many people find a monthly glance plus a proper review once or twice a year is enough. Build and run an ETF portfolio, lesson 8.3, "The yearly review: what to check and what to leave alone", sets out what that review should cover. Between reviews, the only regular action is the automatic monthly investment, and it runs without you looking at the price.
A schedule is easier to keep when your phone stops pulling you back to the app. The changes that help most are:
Move the broker app off your home screen or into a folder you have to search for. Turn off price alerts and daily summary notifications. Unfollow market news accounts that post every swing. If you want something to check daily, check your budget, because you can do something about it.
Hui Min moved her app into a folder on the last page of her phone and turned off all its notifications except trade confirmations. She now checks on the first Saturday of each month, writes the balance in her log, and closes the app. For the first two weeks she still opened the folder out of habit several times a day. By the end of the month she had stopped.
On your own scheduled day, do the same: look, record the balance in a log, and close the app.
Think about how often you look at your investments now, and what schedule would suit money you don't need for years.
Write down how often you check your investments now, and the schedule you will change to.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).