While we all enjoy the incredible benefits that technology has brought us over the past few years, there have been some disadvantages especially when it comes to handling your portfolio. Sure, instant access to all information anywhere, e-mail, the internet and customized tracking of your investments have made a mostly positive difference in all of our lives.
However, there have been some negatives too, as you can get overwhelmed by instant information overload and easily change your focus from macro to micro.
That happened to a couple of retired clients, who got stuck in that mode last year when first being exposed to ETFs. The instant price availability throughout the day caused them to watch the market incessantly while hanging on to every tick change of the ETFs they were invested in. They could not control themselves to do otherwise and finally asked me to replace the ETFs with comparable mutual funds.
Many investors are checking their portfolios several times a day or worse yet, on their cell phone. Others have the need to at least review portfolio changes once at the end of each business day.
Psychologists have proven that constant portfolio monitoring has unintended negative consequences and drains investors’ emotions based on the series of “pangs” (negative or positive portfolio changes) they experience. Here’s how Nassim Taleb describes this curious phenomenon in his book “Fooled by Randomness:”
Regardless of what people claim, a negative pang is not offset by a positive one (some psychologists estimate the negative effect for an average loss to be up to 2.5 the magnitude of a positive one); it will lead to an emotional deficit.
Now that you know that high-frequency investors have more exposure to both stress and positive pangs, and that these do not cancel out, consider that people in lab coats have examined some scary properties of this type of negative pangs on the neural system (the usual expected effect: high blood pressure; the less expected: chronic stress leads to memory loss, lessening of brain plasticity, and brain damage.
What economists did not understand for a long time about positive and negative kicks is that both their biology and their intensity are different. Consider that they are mediated in different parts of the brain—and that the degree of rationality in decisions made subsequent to a gain is extremely different from the one after a loss.
Note also that the implication that wealth does not count so much into one’s well-being as the route one uses to get to it.
In my advisor practice, I have a wide variety of clients form all walks of life with all types of behaviors. I have found that those investors with busy lives (and not much interest in the markets), who only check their brokerage statements once a month, do not lose their long-term perspective as easily as those who are engaged in constant monitoring.
While it’s a natural desire for many to increase tracking of their portfolios when the markets whip-saw and meander aimlessly, much of what we have seen during the past 18 months or so, it can lead to an emotional deficit, as Nassim describes above. If you have found yourself being more on the edge lately, this may explain why.
What can you do about it? Change your habits, which is the hardest thing to do for most of us.