Loss aversion bias and checking your portfolio
How often should you be checking your investment portfolio? Does it matter? From the viewpoint of behavioural biases, there is evidence that experiencing losses leads to poor choices. Loss aversion - our intense dislike of losses can cause us to lose even more if we pay attention to our portfolio losing money. It hasn’t been an issue in the last eight years of a rising equity market and yet, being willing to accept a drawdown or loss is an integral part of managing behaviours needed to be a successful investor.
In the book, The Smarter Screen by Economist Shlomo Benartzi with Jonah Lehrer, an experiment helps shed more light on this:
In one lab experiment by Richard Thaler, Amos Tversky, Daniel Kahneman and Alan Schwartz, subjects were more likely to invest in a bond fund when feedback was given more frequently. Unfortunately, these low-risk bonds also generated lower returns over the long haul. As the scientists noted, “ Providing such investors with frequent feedback about their outcomes is likely to encourage their worst tendencies...More is not always better. The subjects with the most data did the worst in terms of money earned.
Ten years ago, most clients got paper valuations twice a year and so, tended to look at their portfolio valuations twice a year. We now have access to information everywhere, thanks to our magical devices.
The abundance of feedback is not necessarily a good thing especially with medium to long-term horizons in mind- such as a retirement plan twenty years away. Being willing to ‘do nothing’ or hold bonds or investments that may temporarily lose value is necessary for being a successful investor - to avoid impulsive decisions and following the herd.
Investing is simple, but not easy. Being self-aware and getting to know your own behavioural biases is useful if you want to hold onto your wealth from investing.
Further resources:
Saving for tomorrow, tomorrow - Ted Talk by Shlomo Benartzi
Nudge: Improving Decisions About Health, Wealth and Happiness - Richard Thaler
What is Loss Aversion? - YouTube Video
Loss Aversion and The Endowment Effect - YouTube - Dan Ariely