Good reads from around the Web.
Like many truths in investing, the idea that your portfolio will do better if pay less attention to it seems to defy common sense.
After all, it’s not true of many other things in life.
Lawns, relationships, your teeth, and your guinea pig will all suffer under a regime of benign neglect.
However there is solid reasoning from the field of behavioural finance to explain why we usually do badly when we frantically look at our portfolios between every email refresh – or even just every week or month.
In short: It’s because we’re monkeys operating supercomputers.
When we see something happen in our portfolios we want to do something.
And that something is usually for the worst.
The dangers of stock market rubbernecking
But there’s another reason for to keep your online broker password under lock and key, which is that equities are scarier in practice than in theory.
Most people are fine with shares falling when they look at graphs of long-term returns.
“Pfft!,” they say, looking at a wobble on some historical graph. “Call that a crash? I remember the dire headlines in 2008, and if I had my time again I’d be in like Flynn. I’d even sell my neglected guinea pig to put more money into shares!”
But they’re rarely so brave in practice.
If they were then fund flows into equities would increase in bear markets and decline in bull markets. But we know the exact opposite is what actually occurs.
Volatility leads to upset stomachs, as The Value Perspective noted this week:
[The academics] ran a second experiment where they showed the results of an investment simulation to different groups of subjects.
One group were shown the results of the simulation as if they were checking their portfolio eight times a year.
A second group as if they were checking it once a year.
And a third as if they were only doing so once every five years.
Once again, the people who were shown the numbers at lengthier intervals – and so saw less volatility in the results – allocated much more aggressively to equities than those who saw them more frequently.
In other words, those who didn’t see how volatile equities were didn’t really care how volatile equities were.
The takeaway?
If you know you should have a big slug of equities to meet your long-term savings goals but the thought of a stock market crash makes you run for the nearest 1%-a-year Savings Bond, then automate your savings into your diversified portfolio, rebalance every year (or maybe even every two or three years)… and the rest of the time forget you’re an investor at all.
You may will be a better investor for it.
From the blogs
Making good use of the things that we find…
Passive investing
- Why are bonds a useful diversifier? [US but relevant] – Oblivious Investor
- Honoring Yogi – Vanguard
- A 10% correction is statistically normal – Ryan Detrick
- Pros chase performance of a cliff – The Reformed Broker
Active investing
- Selling is the easy part – A Wealth of Common Sense
- How unicorns helped me beat the market – Mr Everyday Dollar
- Beware the trough of disappointment in the tech sector – Value Perspective
- FW Thorpe: A for quality, C for value – Richard Beddard
- Putting a price tag on scandal: Volkswagen – Musings on Markets
Other articles
- Why I’m 80 and still a VC – Alan Patricof
- What investment terms will soon be antiquated? – Abnormal Returns
- Investing in websites – The FIREStarter
- If you’re not getting rich in your 20s, you’re doing it wrong – MMM
- Is your brain a fortress or a wild bus ride? – Dynamic Hedge
Product of the week: Natwest is launching a new 3%-paying cashback current account, reports The Telegraph. The account does not pay the chunky interest rate you get with Santander’s 1-2-3 offering but it typically pays higher cashback rates, so it could be a good option if you don’t keep much cash lying around in your current account.
Mainstream media money
Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1
Passive investing
- Swedroe: Market efficiency isn’t a myth – ETF.com
Active investing
- Steve Cohen’s hedge fund school – Business Insider
- Back-testing blamed for yet another hedge fund blow-up – NY Times
Other stuff worth reading
- Markets: Can they really be tamed? [Search result] – FT
- Are you ready for the next bear market? [US but relevant] – Fortune
- The £1m mortgage business – The Guardian
- Debate: Should old people downsize to help the young? – The Guardian
- The London Underground rent map [Cool graphic] – Huffington Post
- £37,396 a year is the perfect salary for the British – ThisIsMoney
- Dealing with an investing blind spot – NY Times
Book of the week: I’ve included Ben Carlson’s blog A Wealth of Common Sense in these links many times over the years and I flagged up his new book based on my fandom. But then Ben kindly sent me a copy of his book via the magic of Kindle
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]
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Wise advice, as usual. I’ve used Vanguard LifeStrategies for our longest-term portfolios i.e. SIPPs and JISAs… however I love to tinker and research, so I just have to have stocks in my NISA. The pain of seeing them go down in value doesn’t hurt anymore, not that I now understand value and dividend growth investing a lot better than when I first started out and didn’t know the difference between an ETF and a corporate bond.
Cheers
I’ve love to automate and check once per year. But I’m obsessed by costs, and I can’t get broker fees down low enough to be able to do this 🙁 If only Lifestrategy funds were available as ETF’s…
I’ve also got a lotta love for the Lifestrategy funds, but don’t think they’ll ever be seen in ETF form. Besides, Jack Bogle thinks ETFs encourage people to trade too much.
It seems to be pretty easy to trade clean funds too much in UK brokers, since in many you don’t even have any obvious up-front trading fee when you buy and sell (I’ve had to learn to stop “tinkering” and just leave things alone; in USA the Vanguard broker seems to block you from trading a fund if you go in and out of it too often, fairly smart paternalism since Vanguard charges zero dealing fees for trading funds in its USA broker?). Jack Bogle is also skeptical about global diversification since he doesn’t see much good in Europe or EMs, increasing concentration risk by over-exposure to USA. Not sure how useful he is to most people right now, either Americans or elsewhere.
I can see the attraction of an investing approach based on as little adjusting/rebalancing as possible eg annually, whatever. I think such passive approach has to have some sort (not sure how defined) of a balanced long term portfolio.
If it is designed with particular current fashions and market trends then inevitably you will want to make changes when such tends are judged to have altered and new trends emerge.
I have to say I agree in theory but I like to feel like I have some sort of input into the equation and can’t seem to pull the trigger on automation. Even if I mess it up a bit, I am only buying funds or diversified ETFs at the moment and not ever thinking about selling so it’s only a very mild form of market timing (which is partially determined by when I have funds available anyway).
Thanks as always for the link! 🙂
Of course, if we all followed your advice, you’d have far fewer regular readers!
🙂
(I confess to being an every day portfolio checker, and my portfolio has seen “losses” the equivalent of several months take home pay on some days in the current downturn. As a result I’ve been prompted to average down on some holdings, increasing my portfolio yield. Therefore if you’ve the stomach for it, tracking a portfolio can be useful).
Of course, if we all followed your advice, you’d have far fewer regular readers!
I was talking to T.A. about this over our quarterly profligate pub lunch and catch-up somewhere in deepest Berkshire over the weekend… This site does have truly the world’s worst business model! 😉
So yes, yep being naughty everyone! But at least know what rules you’re breaking… 😉
This is such wise advice that we keep hearing but cannot quite seem to apply to ourselves completely. Perhaps that’s partly because we are so new to this FIRE investing.
Like Ric, we’ve been checking our portfolio more often than appropriate for our emotional health these last few weeks. But, yes, we are leaving everything alone. As others are doing, we are even making some tiny additional (index fund) purchases.
Best of luck to all.
Just remember the best investor is a dead investor – its official – Fidelity proved it. Dead men can’t sweat, and I suppose that is their advantage.
I was investing in 2008 and I panicked when I see all the red as the funds dropped through the floor into a negative figure. But I held out, I took the view at that point, that I could afford to lose some money (as I was working) and in the long term it would grow. I continued to invest on an automated monthly basis and looking at what the funds are worth today. I did well so I learnt to hang on.
I agree in theory with this post but in practice I think it is wise to check at least once a month. I have had pension contributions go missing or been underpaid by my employer. Also my own incompetence has seen an isa payment go astray (Never trust yourself :))
Are we allowed to check Monevator *instead* of our portfolios?
Thanks for the links, TI. I’ve nearly made it to Wednesday without looking… 😉