A Tale of Two Frequencies

The biggest challenges I faced investing early on were both, getting to know myself, and the cognitive traps that we are all susceptible to. I am a firm believer that successful investing has more to do with understanding one’s self first, and then developing processes to help short-circuit or sidestep any behaviors that may be damaging to investment performance. Since most people do not have the time to dedicate to mastering oneself specifically for investing, I think it is important to: 

  1. Develop a written financial plan and strategy ahead of investing your money with a financial advisor 
  2. Use small behavioral techniques that can be easily applied to avoid negatively impacting investment results 

Through the process of observing thousands of investors for over a decade, as handheld technology and fintech have both evolved exponentially, I believe the majority could benefit from decreasing the frequency they check their investment account balance. If you have a financial plan in place, and are contributing to your investments regularly as part of that plan, putting a rule in place to only check your account every couple of months,  (better yet – annually) can make a big difference. This is especially true for those that have above average levels of financial anxiety. The less frequently you check your investments, the less likely you are to do something impulsive. This allows you to be proactive, instead of reactive. Similarly, when investing in assets that only have net asset values updated quarterly or less, one may feel this effect to a degree. Coupling this with boycotting financial media, most would see a big improvement in their investor behavior.  

NOTE: Some may say “Don’t you need to know everything that’s going on in the world the second it happens to be good at investing? Wouldn’t watching and reading financial news be mandatory?” However, good investing is more about knowing what not to pay attention to (the noise), rather than paying attention to everything. I am confident that most of what people read and see on TV involving investing and finance could be categorized as noise. It is like having someone yell “don’t miss” when you are taking a free throw in overtime, but repeatedly until you miss.

To illustrate the concept above, I want to walk through a hypothetical scenario use an example from the last 6 months.  

Say that at the start of the year there are two anxious investors, one that checks their investment account daily (or even hourly on some days when they are watching CNBC) and one that checks every couple of months at most while avoiding financial media.  

We will refer to them as investor 2 and investor 1 below.  

Investor 2 likes to buy on “down days” in the stock market because they feel it helps boost their performance, while Investor 1 contributes to their account monthly at a predefined amount that automatically transfers to their investment account. 

Investor 2 checks there account every day in January and February. In the last week of February, they notice their account value starts to drop, and decide to turn on the news to try and figure out why. They spend the next week tracking COVID-19 cases through a dashboard online they saw on CNBC. By the end of the week, the investor begins checking their account as frequently as they can without getting noticed at work.

At this point, the investor is strongly considering liquidating their investments, as it appears the world will be ending shortly. After tossing and turning in bed for the next couple of weeks (towards the middle of March), they have had enough and decide they were right about the world coming to an end. The last month has felt like a lifetime, and they are tired of watching the account go down more and more. On March 20th, the stock market suffered very large intraday declines and the next day Investor 2 decides to liquidate all their investments at the market open.

By the end of May, Investor 2 hears from a friend at work that their investment account has gone up a lot over the last month and decides to turn back on the financial media. With the belief that the world is going to end, the market defies their forecast and pessimistic predictions. They are missing out on making money and starting to get frustrated and agitated. In addition, the Federal Reserve cut interest rates to zero, so they are not earning anything on their cash at the bank. After a couple of weeks of watching the stock market go up every day, the investor, after watching the market relentlessly move lower, decides to get back into the market.

Investor 1 checked their account at the end of last year, just like they always have done for tax reasons. At the end of February, they check their account and see that their account value is slightly less than where it was from the end of last year.  The drop in value was not alarming and they decide to double their contribution for the month. A couple of months pass and the investor checks their account on May 1st.  This time, the investor notices their balance is slightly higher than it was a couple of months ago, due to their monthly deposits, and notice their performance is down slightly but again, nothing alarming.  

Although these are completely fictitious examples, it happens all the time. Which experience seems more productive and enjoyable? I assume most would choose Investor 1 as the answer to that question. Most of the time with investing, less is more. With a fraction of the effort, anxiety, and heartache, Investor 1 will most likely have much better investment performance in the long-run (and usually the short-run in very volatile markets). On the other hand, in the case of Investor 2, the last six months of investing has felt like nothing short of a lifetime and has now bled into their personal life outside of the market.

While the example above may have been a bit dramatic and embellished, it demonstrates how something as simple as changing the frequency at which you check your investment account can have an outsized impact on investing outcomes.