Every day we are constantly reminded that the harder we work at something, the greater the reward. It’s a mantra which is reinforced in childhood, in the office, at the gym…and in most cases, it pays dividends. However, when it comes to investing, this is the exact behaviour you should avoid.
Successful investing involves time in the market (riding the ups and downs), minimising trading, keeping costs low and managing your diversification. These are the things that you can control and they involve very little time and effort.
It can be difficult to stick to this hands-off investment style.
Surely paying more attention and making more decisions creates better outcomes – right? Or maybe not. One of the reasons is the psychological concept of loss aversion. In short, loss aversion refers to the fact that people dislike losing money much more than they like making it!
As a simple example, would you take a bet on a coin flip that would pay you $11 if you win, but you pay $10 if you lose? In a rational world, you should as the potential payoff is greater than the potential loss. But most people would avoid the bet for fear of the potential loss.
When it comes to investing, we know that the stock market can be volatile. Each day it may be up or down (the toss of a coin), but over long periods the market, due to general economic prosperity, long term collective growth and overall advancement, tends to go up.
But loss aversion, coupled with these short term fluctuations that create news headlines, drives us to constantly check our portfolios and reassess our decisions. This may make you more likely to change your investment plan, whether that’s withdrawing money or adjusting your risk exposure – and over the long term that will lead to lower returns!
Surely doing something – anything, is better than doing nothing? Yet nothing has changed in your circumstances to warrant change.
So remember, next time you are tempted to make an active decision or to move away from your plan, successful investors are not busy investors – just smart ones with lots of free time.
If You Shouldn’t Look, Why Do We Show You?
We understand that in today’s world we expect 24/7 access, via our mobile. At Kernel we are dedicated to making investing understandable, transparent and accessible – easy to find information available in the palm of your hand.
Despite this, once you’ve started your investment plan – don’t look. You will be best served to check your portfolio a couple of times a year, or when your personal circumstances change.
To help with this, we have intentionally made our investment cycle weekly, which saves costs and removes the concern of daily price fluctuations. We also have some feature plans coming soon that will help with this.
In short, check your portfolio as often as you like, it will be there, but we suggest only a couple of times a year. Then take action only when your circumstances change substantially.