The rate of checking your investments

I believe that this law is applicable to most things in life. Some goal-setting basics to set our thinking straight:  

1. Set a measurable goal.
2. Measure the goal consistently; and
3. Have an accountability partner to hold you accountable to the goal you are measuring.

The question I wish to explore in this thought piece, and particularly as it relates to investing is ‘How often should you check on your investments?’ i.e., 2. above.

The next section (in italics) appeared in an article penned earlier this year by Sumayya Davenhill, Head of Marketing at M&G Investments, and which article I think addresses the question very well.

You decided to invest. Mapped out your goals and developed an investment strategy to help realise those goals. Setting your investment plan into motion can be exciting and you might find yourself eagerly, even impatiently, waiting to see it come to fruition. But as the old saying goes, “a watched pot never boils.”

When checking your investment performance too often, time may seem to move slowly, since you are focusing on it and waiting for something to occur.

While it is easy to get instant updates on how your investments are performing through online platforms, ask yourself: how does this help you?

Keep in mind that markets are volatile, but it is not your portfolio. You have not actually locked in any performance (gains or losses) until you sell your investment, but many novice investors react emotionally to unwelcome news in the market.

If you have a well-considered financial plan and a diversified investment portfolio, you do not have to check in on your investments every day. You will be working towards a long-term time horizon, where a single day’s dip in a 10-year journey is highly unlikely to make any difference at all.

So, if not daily, how often should you check in on your investments? This depends on your individual circumstances, but it is likely that your financial adviser will tell you to check in once a quarter. Review your quarterly statements to see if there have been any significant moves in the market and look for opportunities… dips in performance often allow you to pick up quality investments cheaply.

For most investors, their fund managers will identify those opportunities and switch into and out of different assets as market conditions change. So, an annual sit-down with your financial adviser should be right.

When you do decide to check in on your investments, be sure to know what you are checking for. Sometimes, market movements can cause certain asset classes to grow faster than others, which means that your asset allocation may need to be rebalanced to bring it back to within its target range. Another thing to look out for is whether you are still on track to meet your long-term investment goals, especially if your goals change along the way.

If the growth of your investment has not met your expectations, ask your financial adviser about the reasons behind that performance. There is usually a good explanation behind short-term underperformance; the trick is not to panic and to remember that performance does not come in a straight line. When investing over the long term, difficulties can (and should) be expected.

Psychological tricks…

No doubt, checking your portfolio too frequently can do more harm than good. That’s because most people hate losing money far more than they love making it—so much so that they will make bad decisions in the name of avoiding future pain. This phenomenon, called loss aversion, was first documented by Daniel Kahneman and Amos Tversky in 1984 and is a major influence on investor behaviour.

Better to avoid the emotional roller coaster by scheduling periodic portfolio checks and establishing ground rules for when to make changes and when to leave your portfolio be.

The point is I think well illustrated in the chart below which is a chart of the FTSE/JSE performance when reviewed daily, monthly, quarterly, yearly, and even every five years.

There are two key observations from the chart. Firstly, things do not change just because they are given more attention, the outcome is the same.. Secondly, how you would have felt about investing in general (and your adviser) throughout the period will have varied depending on how often you checked your balance.

To reinforce the point, statistics show that if you look at your portfolio:

• Daily over one hundred days you would be up 55 days and down 45 days, but you will have a disproportionate sense of loss because of the loss aversion theory.
• Once a year, you would be up 75% of the time.
• Once every three years, you would be up 84% of the time; and
• If you could manage to look at it only once a decade, you would be up 95% of the time!

Click here to listen to more, on the podcast Personal Finance with Warren Ingram

Bottom line

Imagine you are baking a cake. You have carefully selected all the ingredients, mixed them together, and put the cake in the oven. But if you keep opening the oven door every few minutes to check on the cake's progress, you will disrupt the baking process, causing the cake to potentially fall flat or not cook evenly.

Similarly, constantly checking your investment portfolio over short time frames can disrupt the natural process of the market and lead to emotional reactions based on temporary fluctuations. This can trigger loss aversion, where the pain of losing money feels stronger than the pleasure of gaining the same amount.

Instead, it is best to leave your investments to bake, so to speak, over longer periods without constantly checking on them. This way, you allow the market to naturally rise and fall without reacting to every short-term dip, helping you avoid the emotional rollercoaster and make more rational investment decisions in the long run.

An update on your Personal Financial Reports (PFRs)

At PSG Wealth Melrose Arch we have taken a decision to replace the distribution of your Personal Financial Report from monthly to quarterly. It is our view that with an investment portfolio in place, someone's future financial destination will always be the same, whether they check that portfolio regularly or less frequently. As your Advisers and accountability partners we are always available to discuss your portfolio should you have any concerns, especially if your circumstances change.

Office news

We would like to congratulate our friend, partner and colleague Paul Sullivan who received the highly coveted ‘Wealth Manager of the Year’ award at the recent PSG Financial Services national conference hosted at Sun City. Well deserved Paul, we are very proud of you!