It used to be that the only way a person could check on their investments would be to call up their broker or wait to read the stock market listings in the morning newspaper. Now because of the internet and smartphones, a person can check on the performance of their portfolio, pretty much at any time of day, on any day of the year. You can get granular information on the movements of the price from minute to minute if you want. Often these apps are set up using flashes, graphs, and colours to help catch the eye and turn investing into a visual game just like a video game. This has had a profound effect on how people invest, and not in a positive way.
There was a story out of the US recently of a young 20 year old man who committed suicide after checking his account online and discovering he had incurred massive losses. That is an extreme case, but the risks of investing are real nonetheless. The abundance of data now gives investors the impression that they can decipher trends in a stock after only a few minutes, whereas under the old model it would often take weeks. That helps to explain why the average holding period of a stock was 8 years in the 1960s and only a few months today. Who needs to wait 8 years when you have all the data you need to buy and sell right now!
Of course, when we look at the actual results of these investors, we find a disaster. As the Nobel Prize winning Psychologist Daniel Kahneman said "If owning stocks is a long term project for you, following their changes constantly is a very, very bad idea. It's the worst possible thing you can do, because people are so sensitive to short term losses. If you count your money every day, you'll be miserable." If you check your stocks every day, or even multiple times a day, you run the very real risk that you will see a short term trend or an otherwise innocuous event as something that must be acted upon.
Experiments by the aforementioned Daniel Kahneman and other researchers have found that the more people watch their investments, the more likely they are to trade in and out over the short term, and the less likely they are to earn a high return over the long term. This of course makes perfect sense. If you own a great business, you wouldn't trade in and out of it on a daily basis based on what random people offered as a price to buy it from you. That makes no sense.
Time is the friend of the great business, and the longer you own it, the more money you will make. Trading in and out of it will only add trading costs which will reduce your return, and it could also increase the risk that you will not own the business at a key time when the price of the business shoots up. Those are the kinds of mistakes that are completely avoidable and very difficult to recover from.
On the other hand, if you own a bad business, then you shouldn't hold it for even a second of time. The only way you can make a money on a bad business is by getting lucky. You'd be better off taking your money to the roulette table. It will be more enjoyable. Trading bad businesses is even worse than trading good businesses. No amount of checking your stock on your phone will remedy this situation.
During the most recent dip in the market during the period in March when fears over Coronavirus were really heating up, I advised clients on more than a few occasions to not look at their statements. I didn't do this because I wanted to hide information from them. Indeed if there was some benefit that they could get by seeing those statements, I would be all in favour of letting them look. But the fact is there is no benefit from seeing your portfolio down in a crash, and there may be a huge detriment.
The businesses our clients are own are universally great businesses, all of which should have no trouble in enduring through this pandemic and providing good returns in the long term. But their stock prices still drop in a market crash. A client who sees these lower prices might be tempted to panic, and not only lock in a big loss by selling, but would also ensure that they miss out on any future recovery in the price. This would be a BIG detriment, and the fact is that if they don't look at their statements, they're not going to be tempted to panic.
That's one big reason why I advise clients to avoid checking their stocks too often. The second reason is less about your investment returns, and more about your lifestyle. If you're constantly checking your returns on your phone, your taking time away from the rest of your life. We already know that checking your stock prices all the time isn't going to improve your returns, so why are you wasting your time doing it when there are more meaningful things you could be doing? Time is money, but money is also time. Don't spend your time on your money. You'll be wealthier in more ways than one.
- Craig White, BA, LL.B., CIM
Craig White is an Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Craig White an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.
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