By Craig Erwin, Ph.D.
It’s hard not to be worried about your investments this year. The bad news just keeps coming, from the economy to the stock market. Plus, every time you go shopping you get beaten up twice; once at the store and once at the gas pump.
It seems prudent to check your investments when markets are turbulent. But it’s hazardous to do so. Why? Checking your balance might lead you to take actions that are not in your best long-term interest.
Schlomo Benartzi and Richard Thaler, two behavioral economists, found that the more people look at their 401(k)s, the worse their long-term performance. Why? Chances are good that, if someone checks her account frequently enough, she’ll eventually make stupid mistakes, driven by fear or greed. Benartzi and Thaler found that people who don’t check their accounts have much better performance that those who do check them, mostly because they invest more in stocks. So, folks should buy stocks, hold them forever, and resist the temptation to check their accounts. Let them grow unmolested.
It’s not just those who check their accounts who are at risk; those who trade are also at risk. Terrance Odean, a finance professor at the University of California Berkeley found that the more frequently investors trade, the worse their performance. Guess what? The more you check your account, the more likely you are to trade. What’s the lesson here? Set it and forget it. Once you have started saving and investing regularly, the less you mess with your portfolio, the better. Checking in to see how your account is doing is likely to hurt your performance, so don’t look and don’t touch. Warren Buffett claims he is like a sloth, almost always motionless, and very rarely making trades. That has worked very well for Buffett and it can work for you.
When the news is real bad, are you able to ignore it? Do you check your account(s) regularly? How often have you decided to make a change to your investments after checking your account?
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