“When people are frequently told how their investments are doing—say, if they are given a daily update on their long-term investments, by smartphone or any other digital device—they are more likely to make poor financial decisions and possibly sell at the wrong time.”
Shlomo Benartzi, “Keep Stock-Market Apps Off Your Phone,” November 1, 2105, The Wall Street Journal
Are you constantly checking your smartphone or other digital devices for financial updates or account values?
If so, you could be undermining your long-term investment results.
New research shows checking that app too often could be making your investment returns worse, not better, says behavioral economist Shlomo Benartzi of UCLA.
People with financial apps on their phone, or who check results and account values frequently, “tend to make investment decisions based on short-term losses in their portfolio, ignoring their long-term investment plan,” he says.
They can become overly influenced by negative news. When they hear bad investment news, their knee-jerk reaction is to sell. That leads to buying high and selling low, the recipe for investment disaster.
Here’s how Benartzi explains it:
“Consider what you’re likely to find if you monitor the S&P 500 index at different intervals. If you check every single day, there’s a roughly 47% chance that the market will have gone down, based on its past movements. But what happens if you check once a month? The numbers will start to look a little better, as the market will only have gone down 41% of the time. Years are better still, as the S&P generates a positive return seven years out of every 10. And if you check once a decade, then you’re only going to get bad news about 15% of the time.”
Behavioral finance experts Richard Thaler, Amos Tversky, Daniel Kahneman and Alan Schwartz also found that investors given more frequent feedback on their investments responded by gravitating to safer investment choices.
“Unfortunately,” reports Benartzi, “the safer investment also generated lower returns over the long haul.”
More experienced investors know that markets go up and down, and tend to ignore periodic market fluctuations. That helps them stick to their long-term asset allocation plan, and earn the higher returns they need to make their money last. Reacting to market “noise” can make you miss out on the returns you need.
The Takeaway: Contrary to popular belief, frequent trading or reacting too frequently to market movements makes your returns worse, not better.
So turn off the TV, trash those market apps on your smartphone, and stop obsessing over the market value on your monthly statements. Your portfolio will be better off for it.