Shailesh sat in the balcony of his 43rd-floor apartment scrolling through his investment app. The market had fallen 1.12% that day. His portfolio was down 8% over the past few months.
He had been watching the falling markets with dismay for the last couple of months. He called his two friends.
The first, Viswanath, treated investing like a game of rummy—constantly buying, selling and reshuffling his portfolio. Shailesh had tried this formula but had not been rewarded well for his efforts.
The second, Viren, was a seasoned investor who had built wealth through patience. He made short work of the market volatility and global uncertainties and suggested careful deliberation, and a long-term investment approach.
He upbraided Shailesh for constantly looking at the portfolio and tinkering with it. “You are seeking stimulation, not returns,” he told Shailesh.
That observation captures one of the biggest mistakes investors make. Many spend more time watching their portfolios than managing their finances.
Why do investors compulsively track their portfolios, and what damage does it cause?
Action bias: We are all wired to keep doing something. Inaction feels lazy, detached and irresponsible. That is why we dread inactivity as we equate activity with progress. But with investments, patience gets rewarded more. Knee-jerk action destroys portfolios. Compounding needs silence.
Illusion of control: Checking the portfolio constantly gives the sense of being responsible for investments and being on top of it. Many think that constant monitoring somehow reduces risk and that frequent portfolio actions improve outcomes. However, this is an illusion of control where the behaviour of constant checking sabotages the portfolio.
Going with the flock: Investors like to follow the herd and invest in trending themes. Everyone cannot be wrong, goes the sentiment!
Media & social media reportage that tends to create a frenzy, amplifies the fear of missing out on the action, which is also a reason why investors constantly keep checking whether their portfolios are doing well or not.
Dopamine fix: Checking portfolios provides emotional stimulation and is psychologically addictive. For many, it provides a validation of their worth. The alternating cycle of gloom and euphoria is stressful but is a dopamine fix people seek nevertheless! The unpredictability becomes addictive.
Excessive churn: The unfortunate consequence of an unrelenting focus on the portfolio dashboard is an unwanted portfolio oversight. It can result in switching funds due to a recent return drop, rotating themes based on what is in favour then and timing actions based on news or other information.
All these results in portfolio churn that increases costs and taxes. Also it disrupts the integrity of the portfolio that needs to be constructed after taking into account risk profile, return sought, tenure, liquidity, taxation, nearness of the goals, personal situation etc.
Excessive churning prevents portfolio components from settling and delivering returns when the cycle turns favourable. It disrupts beneficial compounding which can happen only with time. Mistaking temporary underperformance of investments for failure results in uprooting the investment and abandoning strategies midway, which results in catastrophic consequences for the portfolio.
Stress & opportunity cost: Constant monitoring of portfolio, and markets, and tracking news, makes them draw conclusions based on what they are hearing at that point. This is what is also called recency bias.
Buying/selling decisions go wrong where the investor buys high on euphoria and exits low when the sentiment turns. That is exactly contrary to the basic investing principles!
Also, there is an opportunity cost to the amount of time and effort one may need to invest doing all these. This may take time away from investments, which could advance their career and what they can do to get ahead with that. This time could have been utilised in building/strengthening relationships, health, learning skills, pursuing hobbies or even just relaxing.
Obsessively following the markets and portfolios also exposes a person to increased anxiety and stress they perceive, stemming from the news and information flow they track, market movements, policy actions, etc.
Viren also said that if managing money looks difficult, he should engage professional assistance.
Patience and letting the portfolio be may look like inaction. But that may be the best action for the health of one’s wealth.
Suresh Sadagopan, the author, is MD & Principal Officer at Ladder7 Wealth Planners and the author of the book “If God Was Your Financial Planner”. Views are personal.