Why Checking Your Net Worth is Destroying Your Returns
Monitor But Don't Obsess Over the Number on the Screen
It used to be that checking your investment portfolio was an annual event.
If you are of a certain age, you would have received a thick, confusing paper statement in the mail, glanced at the bottom line, filed it away in a desk drawer, and completely forgot about it until next year.
Today, your entire financial life lives on the home screen of your phone.
The modern personal finance ecosystem dictates that you need an app that aggregates your bank accounts, credit cards, and investments, updating your net worth in real-time.
It feels incredibly responsible to know exactly where you stand, pulling up your financial dashboard while you wait in the drive-thru or sit in the car at school pickup.
But if you are checking on your investment portfolio that often, you are needlessly subjecting yourself to an emotional rollercoaster.
When you blindly embrace the idea that more financial data is always better, you ignore the massive, invisible toll it takes on your emotional well being and can have the exact opposite of the desired effect.
The Problem with Constantly Checking Your Investment Returns
Why wouldn’t you want to monitor your progress every single day?
Because the stock market is a volatile, chaotic mess in the short term, and human beings are biologically wired to panic. And Panic is one of the leading causes of avoidable financial self-destruction.
Daily life is already hard enough, and your brain is likely exeeding it’s capacity for stimulation on a daily basis. Every time you open your investment app and see your net worth drop by a few hundred, or even a few thousand dollars, because of a random Tuesday market dip, your brain registers it as a physical threat because your brain is hard-wired to do so.
The more you look, the more it hurts. The more it hurts, the more likely you’ll feel the need to do something about it. That leads to panic-fueled financial decisions like selling during a market dip, only to buy back at the next market peak.
Sell-low, buy-high. Rinse and repeat until you’ve hacked away a huge chunk of your potential net worth.
Myopic Loss Aversion
This self-defeating cycle of constnatly panic checking your portfolio and the fear that causes has a name, it’s called myopic loss aversion.
To learn the key concept of myopic loss aversion (something I dedicate a chapter to in The Rational Investor), we can look at the landmark research by behavioral economists Shlomo Benartzi and Richard Thaler.
The researchers identified a psychological phenomenon they coined “Myopic Loss Aversion,” which proves how the frequency of checking your portfolio completely rewires your risk tolerance.
The Miserable Math On Greed and Fear
The researchers highlighted that losses hurt human beings roughly twice as much as equivalent gains feel good.
Because the stock market goes down almost as often as it goes up on a daily basis, an investor who checks their app every day will experience the psychological pain of losing money constantly, even in a strong bull market.
The Short-Term Trap
The study proved that when investors evaluate their portfolios too frequently, they suffer from extreme myopia.
The daily noise completely blinds them to the long-term upward trajectory of human progress, making the stock market feel significantly riskier than it actually is.
The Cost of Over Checking.
The primary reason constant monitoring is so dangerous is that it forces action. The researchers concluded that investors who check their balances frequently are far more likely to panic-sell during routine dips and shift their money into low-yielding, “safe” assets, which lowers their expected future returns (how much their portfolio increases by), which means they accumulate muss less wealth in the long run.
That means, you’d need to work longer, or save a higher percentage of your income to end up with the same amount of money in retirement compared to the scenario where you don’t obviously check your portfolio. Myopic loss aversion can lead to lower living standards.
Your portfolio is a long-term vehicle, not a daily scorecard.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.