A lot of investing is counterintuitive. For most other areas of life, being hypervigilant and checking on your progress helps you move forward. Working out consistently and monitoring your diet helps your health. Checking on the plants in your garden or house ensures they have what they need. Contacting loved ones regularly builds strong relationships.
In investing, frequent monitoring can hurt instead of help. It’s a completely normal and human impulse to want to check on things often. You want to feel in control and like you’re actively contributing to positive outcomes. And checking in itself is not wrong. The risk comes from what checking too often might make you do.
Watching the fluctuating values of your investments creates a very strong impulse to modify your portfolio when the value drops. Many studies have shown that more trades equal worse performance.
“The average individual investor underperforms a market index by 1.5% per year. Active traders underperform by 6.5% annually.” -Trading is hazardous to your wealth: The common stock performance of individual investors by Brad Barber & Terrance Odean
“Returns clearly show that the probability of being profitable goes down proportionally with the volume of trades made. That is, the most profitable cohort of day traders were those who only made a single day trade all year.” -Day Trading for a Living? By Fernando Chauge, Rodrigo De-Losso, and Bruno Giovannetti
Warren Buffet’s advice to avoid this is simple: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Long-term wealth is built by creating a strong portfolio and holding it for a long time, with adjustments done as needed. Your plan is designed for the long term, but the short term can be bumpy. Constantly doing short-term checkups greatly increases the likelihood of getting scared and abandoning the plan when your portfolio is down.
We find that semi-annual or annual reviews are best to make sure your plan is still working for you, without the anxiety of monitoring the day-to-day volatility.
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